Corporate governance and expected stock returns : evidence from Germany

Recent empirical work shows that a better legal environment leads to lower expected rates of return in an international cross-section of countries. This paper investigates whether differences in firm-specific corporate g
Recent empirical work shows that a better legal environment leads to lower expected rates of return in an international cross-section of countries. This paper investigates whether differences in firm-specific corporate governance also help to explain expected returns in a cross-section of firms within a single jurisdiction. Constructing a corporate governance rating (CGR) for German firms, we document a positive relationship between the CGR and firm value. In addition, there is strong evidence that expected returns are negatively correlated with the CGR, if dividend yields and price-earnings ratios are used as proxies for the cost of capital. Most results are robust for endogeneity, with causation running from corporate governance practices to firm fundamentals. Finally, an investment strategy that bought high-CGR firms and shorted low-CGR firms would have earned abnormal returns of around 12 percent on an annual basis during the sample period. We rationalize the empirical evidence with lower agency costs and/or the removal of certain governance malfunctions for the high-CGR firms.
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Metadaten
Author:Wolfgang Drobetz, Andreas Schillhofer, Heinz Zimmermann
URN:urn:nbn:de:hebis:30-7379
Series (Serial Number):Arbeitspapiere / Johann-Wolfgang-Goethe-Universität, Institut für Bankrecht (110)
Document Type:Working Paper
Language:English
Date of Publication (online):2005/04/11
Year of first Publication:2003
Publishing Institution:Univ.-Bibliothek Frankfurt am Main
Release Date:2005/04/11
Tag:asset pricing; corporate governance ; principal-agent theory
SWD-Keyword:Corporate Governance
Source:Institut für Bankrecht, Arbeitspapiere 110
HeBIS PPN:211303208
Institutes:Rechtswissenschaft
Dewey Decimal Classification:340 Recht
Sammlungen:Universitätspublikationen
Licence (German):License Logo Veröffentlichungsvertrag für Publikationen

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