Research Bibliography

Corporate Governance & Portfolio Returns

-- Table of Contents and Sample Entries --

Table of Contents

Board - Appointment of Directors

Board - Composition and Structure

Disclosure - Earnings Management, Financial Reporting and Fraud

Environmental and Social - Firm Level Performance

Environmental and Social - Screening and Portfolio Performance

Fixed Income - Debt

General - Correlation between Governance and Performance

Emerging and International Markets

International - Country Comparison

International - Cross Listing

International - Country Specific

Brazil

Canada

China

Germany

India

Japan

Korea

New Zealand

Norway

Russia

Singapore

Spain

Sweden

United Kingdom

Management - Compensation

Management - Power

Management - Succession Planning and Change

Market for Control

Ownership Structure - Institutional

Ownership Structure - Management and Board

Sample Entries

Millstein, Ira M. and Paul W. MacAvoy. June 1998. The Active Board of Directors and Performance of the Large Publicly Traded Corporation. Columbia Law Review, 98. 1283-1322

Ira Millstein is senior partner at the New York law firm Weil, Gotshal & Manges and a well-known and respected corporate governance expert. Paul MacAvoy is the Williams Brothers Professor of Management at the Yale School of Management. The authors' hypothesis is that a professional board, which is independent of management, should tip the scales in favor of higher returns to investors.

Study Design

Returns to investors are defined as the achievement of "economic profit," i.e., operating earnings in excess of the costs of capital, a common variant of EVA. A professional board was based on the authors' evaluation of key metrics for professional board behavior, largely derived from the well-known General Motors corporate governance guidelines. Using responses to a CalPERS survey, the study identifies those corporations, which the surrogates for professional board behavior have been present, based on the perception of those surrogates. The study then analyzed a large sample of corporations with two metrics: first, the grade assigned by CalPERS for governance, and second, a "presence" or "absence" grade assigned based on the evaluation of key surrogates for professional board behavior.

Results and Conclusions

An empirical study of 154 firms based on 1991-1995 data found that the added returns to investors associated with the presence of a professional board were positive and significant. More specifically, the two metrics mentioned above demonstrated a statistically significant relationship between an active, independent board and superior corporate performance as measure by earnings in excess of costs o capital over the industry average. Corporations that received an "A+" CalPERS corporate governance grade and corporations that were graded as having active governance "present" both performed significantly better in generating earnings in the 1990's than did the other corporations in the sample of large domestic corporations. This research demonstrates a substantial and statistically significant correlation between an active, independent board and superior corporate performance.

Bhojraj, Sanjeev & Partha Sengupta, 2003. Effect of Corporate Governance on Bond Ratings and Yields: The Role of Institutional Investors and Outside Directors. The Journal of Business, Vol 76, No.3.

This paper provides evidence linking corporate governance mechanisms to higher bond ratings and lower bond yields. Governance mechanisms can reduce default risk by mitigating agency costs and monitoring managerial performance and by reducing information asymmetry between the firm and the lenders. We find firms that have greater institutional ownership and stronger outside control of the board, enjoy lower bond yields and higher ratings on their new bond issues. However, concentrated institutional ownership has an adverse effect on yields and ratings. These results are robust to a specification that controls for institutional ownership being influenced by bond yields.

Gompers, Paul A., Joy L. Ishii and Andrew Metrick. February 2003. Corporate Governance and Equity Prices. Quarterly Journal of Economics, Vol. 118, No. 1, 107-155.

Corporate-governance provisions related to takeover defenses and shareholder rights vary substantially across firms. Paul A. Gompers, professor of business administration at Harvard, Wharton finance professor Andrew Metrick and Joy L. Ishii of the Harvard Economics Department find performance differences between these firms.

Study Design

Gompers and his colleagues rated 1,500 companies for each year of the '90s on a "Governance Index" which gave equal weight - one point, or "G" - to each of 24 shareholder-rights provisions. The firms were ranked by decile: the 10 percent of firms with the most anti-shareholder provisions were in the highest decile of the index, comprising the "Management Portfolio." Those with the least provisions were in the lowest decile, the "Shareholder Portfolio."

Results and Conclusions

The study finds that corporate governance is strongly correlated with stock returns during the 1990s. An investment strategy that purchased shares in the lowest-G firms ("Democracy" firms with strong shareholder rights), and sold shares in the highest-G firms ("Dictatorship" firms with weak shareholder rights), earned abnormal returns of 8.5 percent per year. At the beginning of the sample, there is already a significant relationship between valuation and governance: each one-point increase in G is associated with a decrease in Tobin's Q of 2.2 percentage points. By the end of the decade, this difference has increased significantly, with a one-point increase in G associated with a decrease in Tobin's Q of 11.4 percentage points. The results for both stock returns and firm value are economically large and are robust to many controls and other firm characteristics.

GovernanceMetrics International. September 9, 2003. Global Performance Analysis.

Study Design

In the present research, GMI compares the company performance of its top 10%-rated and bottom 10%-rated companies on a variety of measures. Company performance is defined as average annual total returns to shareholders for the past 1-, 3-, 5-year, and in some cases 10-year periods.
Many academic studies comparing corporate governance and corporate performance focus on one or two specific issues, such as takeover defenses or presence of large outside owners. GMI examines a broad array of governance attributes at companies including social and environmental practices and board integrity issues. In this way, we believe GMI captures a better-defined picture of a company's governance practices-and pertinent risks to shareholder value. In the present paper, GMI shows that broad-based measures of corporate governance can directly relate to critical measures of shareholder value and corporate performance.

Conclusions

GMI's research underscores a substantive link between strong, investor friendly governance practices and average annual total returns as measured over a number of multi-year periods. The connection between strong corporate governance and higher average annual total returns persists in a number of areas, demonstrating that investor will consistently pay a premium for companies with strong governance relative to their peers.

McKinsey & Company. Global Investor Opinion Survey 2000: Key Findings.

Increased shareholder activism in the U.S. and elsewhere stems from the conviction that better corporate governance will deliver higher shareholder returns. Yet repeated attempts by academics to show an irrefutable link between the two have failed. In what is probably the best known survey of its kind McKinsey and Company conducted a series of surveys to discover how shareholders perceive and, importantly, value corporate governance in both developed and emerging markets.

Study Design

Undertaken in cooperation with the World Bank and the Institutional Investors regional institutes, the surveys gathered investment responses about investment intentions from over 200 institutional investors, who together manage approximately US $3.25 trillion assets. Forty percent of the respondents were based in the U.S.

Results and Conclusions

Three quarters of investors say board practices are at least as important to them as financial performance when they are evaluating an investment. In Latin America, almost half of the respondents consider board practices to be more important than financial performance. Over 80 percent of investors say they would pay more for the shares of a well-governed company than for those of a poorly governed company with comparable financial performance. The actual premium investors say they would be willing to pay for well-governed company differs by country. For example, investors say they would pay 18 percent more for the shares of a well-governed UK company than for the shares of a company with similar financial performance but poorer governance practices. They would be willing to pay a 22 percent premium for a well-governed Italian company and a 27 percent premium for one in Venezuela or Indonesia. Other markets fell in between, with Mexico at 21.5 percent and Malaysia at 24.9 percent, for example. The survey also found that the average premium investors would be willing to pay in each market was different for local and foreign investors. In Asia, for example, local investors would be willing to pay an average governance premium of 20.2 percent compared for 26.3 percent for foreign investors. These findings are what one would expect, since local investors have access to quicker and better information and often know the boards and management of their domestic portfolio companies. For foreign investors, good corporate governance can be seen as way to mitigate agency costs.