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Does Corporate Governance Matter? Evidence from the AGR Governance Rating

Author

Listed:
  • Alberto Plazzi

    (University of Lugano and Swiss Finance Institute)

  • Walter N. Torous

    (Massachusetts Institute of Technology)

Abstract

Poor corporate governance permits unreliable financial reporting by a firm's management. The AGR governance rating is based on the premise that a more accurate assessment of the effects of corporate governance can be formulated by taking this output of corporate governance into account in addition to traditional governance inputs such as board structure. We document that the time series variation in a firm's AGR score reliably forecasts the firm's Return on Assets (ROA) and other measures of firm performance. A portfolio going long shares of better governed firms with high AGR scores and shorting shares of poorly governed firms with low AGR scores generates a risk-adjusted return of approximately 5% per year. Most of this return differential originates with firms having poor corporate governance. Overall, our results are consistent with a causal link between corporate governance and future firm and stock price performance.

Suggested Citation

  • Alberto Plazzi & Walter N. Torous, 2016. "Does Corporate Governance Matter? Evidence from the AGR Governance Rating," Swiss Finance Institute Research Paper Series 16-54, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1654
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    More about this item

    Keywords

    corporate governance; AGR; operating performance;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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