Empirical Evidence on Corporate Governance in Europe. The Effect on Stock Returns, Firm Value and Performance

Abstract

In this paper we analyze whether good corporate governance leads to higher common stock returns and enhances firm value in Europe. Throughout this study we use Deminor Corporate Governance Ratings for companies included in the FTSE Eurotop 300. Following the approach of Gompers, Ishii and Metrick (2003) we build portfolios consisting of well-governed and poorly governed companies and compare their performance. We also examine the impact of corporate governance on firm valuation. Our results show a positive relationship between these variables and corporate governance. This relationship weakens substantially after adjusting for country differences. Finally, we analyze the relationship between corporate governance and firm performance, as approximated by Net-Profit-Margin (NPM) and Return-on-Equity (ROE). Surprisingly, and contrary to Gompers, Ishii and Metrick (2003), we find a negative relationship between governance standards and these earnings based performance ratios for which we discuss possible implications.

Keywords: corporate governance, financial performance, shareholder value, firm value, asset pricing

JEL Classification: G12, G20, G23