Do Stock Prices Reflect the Corporate Governance Quality of Japanese Firms?

35 Pages Posted: 30 Apr 2007

See all articles by Hiroyuki Aman

Hiroyuki Aman

Nagasaki University - Department of Economics

Pascal Nguyen

University of New South Wales

Multiple version iconThere are 2 versions of this paper

Date Written: April 2007

Abstract

We construct a governance index based on several attributes known to be associated with good corporate governance. After checking that the index is positively associated with standard indicators of firm performance, we use it to evaluate the returns on governance-sorted portfolios. Our main finding is that poorly governed firms significantly outperform better-governed firms. However, this result derives from the greater risk exposure of poorly governed firms. After adjusting for size and book-to-market, excess returns become insignificant across all portfolios. We verify that neither the sample period nor the behavior of specific industries is responsible for this outcome. Consistent with market efficiency, stock prices appear to fairly reflect the higher (lower) risk associated with poor (good) corporate governance.

Keywords: corporate governance, performance, stock returns, risk exposure, market efficiency

JEL Classification: G11, G12, G14, G34

Suggested Citation

Aman, Hiroyuki and Nguyen, Pascal, Do Stock Prices Reflect the Corporate Governance Quality of Japanese Firms? (April 2007). Available at SSRN: https://ssrn.com/abstract=983301 or http://dx.doi.org/10.2139/ssrn.983301

Hiroyuki Aman

Nagasaki University - Department of Economics ( email )

4-2-1 Katafuchi
Nagasaki 850-8506
Japan
+81 95 820 6409 (Phone)

Pascal Nguyen (Contact Author)

University of New South Wales ( email )

Sydney, NSW 2052
Australia
(61) 2-9385-5773 (Phone)
(61) 2-9385-6730 (Fax)

HOME PAGE: http://www.banking.unsw.edu.au/pascalnguyen/

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