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How Does Corporate Governance Affect Equity Volatility? Worldwide Evidence and Theory

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  • Louis Gagnon
  • Alexandre Jeanneret

Abstract

We investigate the causal impact of corporate governance on equity volatility in a quasi-natural experimental setting by exploiting the staggered passage of governance reforms in the past 25 years. Using a sample of 33,831 firms from 48 countries, we find that equity volatility drops by one-fifth following the passage of reforms that increase board independence. This effect is driven by an adjustment in fixed operating costs as managerial expropriation decreases, rather than by changes in firms’ investments, profitability, asset risk, or financing decisions. We rationalize these findings with a model in which minority shareholders are subject to sticky managerial expropriation. (JEL G12, G32, G34)

Suggested Citation

  • Louis Gagnon & Alexandre Jeanneret, 2025. "How Does Corporate Governance Affect Equity Volatility? Worldwide Evidence and Theory," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 14(1), pages 166-203.
    • Handle: RePEc:oup:rcorpf:v:14:y:2025:i:1:p:166-203.
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    File URL: http://hdl.handle.net/10.1093/rcfs/cfad002
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    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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