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Corporate Governance and Expected Stock Returns: Evidence from Germany
Author(s) -
Drobetz Wolfgang,
Schillhofer Andreas,
Zimmermann Heinz
Publication year - 2004
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/j.1354-7798.2004.00250.x
Subject(s) - corporate governance , business , dividend , valuation (finance) , empirical evidence , monetary economics , stock (firearms) , valuation effects , jurisdiction , sample (material) , initial public offering , accounting , stock exchange , financial economics , economics , finance , mechanical engineering , philosophy , chemistry , epistemology , chromatography , political science , law , engineering
Recent empirical work shows evidence for higher valuation of firms in countries with a better legal environment. We investigate whether differences in the quality of firm‐level corporate governance also help to explain firm performance in a cross‐section of companies within a single jurisdiction. Constructing a broad corporate governance rating (CGR) for German public firms, we document a positive relationship between governance practices and firm valuation. There is also evidence that expected stock returns are negatively correlated with firm‐level corporate governance, if dividend yields are used as proxies for the cost of capital. An investment strategy that bought high‐CGR firms and shorted low‐CGR firms earned abnormal returns of around 12% on an annual basis during the sample period.