Stock Market Returns, Corporate Governance and Capital Market Equilibrium

Bruno Maria Parigi, Loriana Pelizzon () and Ernst-Ludwig von Thadden

No 4496, CESifo Working Paper Series from CESifo

Abstract: This paper proposes a theoretical model that incorporates corporate governance into the basic CAPM, where corporate governance affects the disutility of managerial effort and the possibility of managers to divert company resources. It shows that corporate governance affects firms’ stock returns and also how the quality of corporate governance is chosen endogenously. The model predicts that in equilibrium the quality of corporate governance correlates positively with â and idiosyncratic volatility and negatively with returns on assets. Various tests with U.S. firm data using the corporate governance index of Gompers, Ishii, and Metrick (2003) confirm these predictions.

Keywords: corporate governance; CAPM; variability of returns (search for similar items in EconPapers)
JEL-codes: G32 G38 K22 (search for similar items in EconPapers)
Date: 2013
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Working Paper: Stock Market Returns, Corporate Governance and Capital Market Equilibrium (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_4496

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