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Corporate governance ratings as a means to reduce asymmetric information

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  • Claus Holm
  • Morten Balling
  • Thomas Poulsen

Abstract

Can corporate governance ratings reduce problems of asymmetric information between companies and investors? To answer this question, we set out to examine the information basis for providing such ratings by reviewing corporate governance attributes that are required or recommended in laws, accounting standards, and codes, respectively. After that, we scrutinize and organize the publicly available information on the methodologies actually used by rating providers. However, important details of these methodologies are treated as confidential property, thus we approach the evaluation of corporate governance ratings as a means to reduce asymmetric information in a more general manner. We propose that the rating process may be seen as consisting of two general activities, namely a data reduction phase, and a data weighting, aggregation, and classification phase. Findings based on a Danish data-set suggest that rating providers by selecting relevant attributes in an intelligent way can improve the screening of companies according to governance quality. In contrast, it seems questionable that weighting, aggregation, and classification of corporate governance attributes considerably improve discrimination according to governance quality.

Suggested Citation

  • Claus Holm & Morten Balling & Thomas Poulsen, 2014. "Corporate governance ratings as a means to reduce asymmetric information," Cogent Economics & Finance, Taylor & Francis Journals, vol. 2(1), pages 1-16, December.
    • Handle: RePEc:taf:oaefxx:doi:10.1080/23322039.2014.919235
    DOI: 10.1080/23322039.2014.919235
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    1. Annita Florou & Argiris Galarniotis, 2007. "Benchmarking Greek Corporate Governance against Different Standards," Corporate Governance: An International Review, Wiley Blackwell, vol. 15(5), pages 979-998, September.
    2. Michail Nerantzidis, 2018. "The role of weighting in corporate governance ratings," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 22(3), pages 589-628, September.

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