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

EFMA 2004 Basel Meetings Paper

24 Pages Posted: 29 Oct 2003

See all articles by Rob Bauer

Rob Bauer

Maastricht University

Nadja Guenster

University of Muenster - Finance Center Muenster; University of California, Berkeley

Rogér Otten

Maastricht University - Limburg Institute of Financial Economics (LIFE)

Date Written: October 23, 2003

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

Suggested Citation

Bauer, Rob and Guenster, Nadja and Otten, Rogér, Empirical Evidence on Corporate Governance in Europe. The Effect on Stock Returns, Firm Value and Performance (October 23, 2003). EFMA 2004 Basel Meetings Paper. Available at SSRN: https://ssrn.com/abstract=444543 or http://dx.doi.org/10.2139/ssrn.444543

Rob Bauer

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands
+31 43 3883871 (Phone)

Nadja Guenster (Contact Author)

University of Muenster - Finance Center Muenster ( email )

Universitatsstr. 14-16
Muenster, 48143
Germany

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

Rogér Otten

Maastricht University - Limburg Institute of Financial Economics (LIFE) ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands
+31 43 388 3838 (Phone)
+31 43 388 4875 (Fax)

HOME PAGE: http://www.fdewb.unimaas.nl/finance/faculty/Otten

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