Brown and Caylor (2004)

Brown, Lawrence D. and Marcus L. Caylor. "The Correlation between Corporate Governance and Company Performance." Institutional Shareholder Services, 2004.

A very detailed study of the impact of corporate governance practices on equity performance and other firm characteristics. The study includes two separate statistical analyses, both cross-sectional regressions with data current as of 9/26/03:

First, using the ISS industry-adjusted corporate governance ratings as the independent variable and 35 fundamental indicators as dependent variables, the authors analyzed the 5,460 companies in the ISS database. This analysis showed that companies with top-decile corporate governance scores had higher trailing 3-, 5-, and 10-year returns than those in the bottom decile (my calculator says this is also true of the top three minus the bottom three deciles -LK), as well as higher profitability, returns on assets, and solvency (as measured by Z-score). Most correlations were significant at the 1% level. The authors contend that companies with lower corporate governance scores are riskier, although this point may be debated given that top-decile companies had higher betas than bottom decile ones.
Second, the authors regressed each of the four ISS governance subcategory ratings (board composition, compensation, takeover defenses, and audit) against the 35 fundamental variables. This analysis finds that "board composition is the most important factor," with 13 of 15 key variables having the expected sign. "Compensation the next most important factor (a distant second), audit is the third most important factor, and takeover [defenses are] unimportant or (at worst) perverse."

The cross-sectional nature of the study means that it does not include time-series or formal attribution analysis of returns, but the authors indicate that they are "in the process of verifying that our results are robust to other time periods."

This study was commissioned by Institutional Shareholder Services, a corporate governance research vendor.

Link:  https://papers.ssrn.com/sol3/papers.cfm?abstract_id=586423

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