What You See Is What You Get But Do Investors Reward Good Corporate Governance When They See It?

Alberto Plazzi, Walter Torous and Umit Yilmaz

Chapter 4 in Behavioral Finance:A Novel Approach, 2020, pp 73-98 from World Scientific Publishing Co. Pte. Ltd.

Abstract: Poor corporate governance facilitates unreliable financial reporting. The AGR governance rating is based on the premise that a more accurate assessment of corporate governance can be formulated by taking this output of corporate governance into account. We document that time series variation in a firm’s AGR rating reliably forecasts measures of firm operating performance. A long/short strategy based on the AGR rating generates a risk-adjusted return of approximately 5% per year but, consistent with learning by the market, this abnormal performance has been declining over time. Most of this return differential originates with firms having poor corporate governance.

Keywords: Analysts Recommendations; Behavioral Biases; Behavioral Economics; Behavioral Finance; Board of Directors; Compensation; Compensation Committee; Control; Coronavirus; Corporate Governance; COVID-19; Decision Making; Disposition Effect; Earnings Management; Elections; Emotions; Financial Crises; Financial Market Anomalies; Financial Markets; Forecast-Accuracy; Gender Differences; Heuristics; Interval Forecasting; Investment; Investor Horizon; Investors' Beliefs; IPO Under-Pricing; Life Expectancy; Myopia; Overconfidence; Pensions Industry; Policy Reforms; Polls; Portfolio Risk; Prediction Markets; Regulation; Stock Price Drifts; Time Preferences (search for similar items in EconPapers)
JEL-codes: G3 G30 G4 G41 (search for similar items in EconPapers)
Date: 2020
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