The Impact of Corporate Governance on Stock Market Performance

6352 Words Sep 27th, 2009 26 Pages
Impact of Corporate Governance on Stock Market Performance

Farah Rezwan

Reyan Zeenat Hai
Nogmaye Habiba

Abstract

The paper aims to establish a relationship between Corporate Governance and stock market performance. In doing so, several variables had been identified by a thorough review of literature. These variables were measured on the basis of their performance, in respect to developed and developing countries, in relation to Corporate Governance. The performance measures were done by using data and graphical representations. The analysis recognized a significant relationship between corporate governance and stock market performance.

Keywords: Market Efficiency, Market Valuation

Introduction:

A country’s economic condition
…show more content…
Section 3 provides a detailed analysis of empirical results. In the last section we have concluded the paper.

Literature Survey:

Gompers, Ishii, and Metrick (2001) used differences in takeover defense provisions to create a corporate governance index of US firms and found that firms with stronger shareholder right have better operating performance, higher market valuation and are more likely to make acquisition. In another study, (2003) they showed that companies with strong shareholders rights yielded annual returns that were 8.5% greater than those with weak rights. Shleifer and Vishny (1997) define corporate governance as a set of mechanism through which outside investors protect themselves against expropriation by insiders. Theoretical models La Porta, Lopez-de-Silanes, Shleifer, and Vishny (2002) and Shliefer and Wolfenzon (2002) predict that investors pay more because they recognize that with better legal protection more of the firms profit would come back to them as interest or dividends as opposed to being expropriated by the entrepreneur who control the firm. Agency problem may lead to low stock price multiples as investors anticipate the cash flows will be diverted. Also, good corporate governance may reduce the return on equity to the extent that it reduces shareholder’s monitoring and auditing cost. Ultimately this should lead to a higher firm valuation (Wolfgang Drobetz).

In a different study by Credit Lyonnais Securities Asia (further
Open Document