A Study on the Relationship between Corporate Governance Ratings and Company Value: Empirical Evidence for S&P 100 Companies

Abstract

The goal of the current study is to examine the relationship between corporate governance ratings and company value, for all the companies included in the S&P 100 Index, with the exception of companies involved in the financial sector, using data for 2013. The value of the company is quantified using the Tobin's Q ratio and the Enterprise Value, adjusted according to each activity sector. The corporate governance practices are reflected using the ISS Governance QuickScore 2.0 overall rating, provided by the Institutional Shareholder Services Inc. (ISS), as well as ratings for the board structure, compensation, shareholder rights, and audit. By estimating cross-section regression equations, we revealed the lack of a statistically significant relationship between the corporate governance ratings and company value. Therefore, when making investment decisions, these corporate governance ratings should be taken into consideration with certain reservations.

Evaluating the link between commercial governance ratings and firm performance in a cross-European setting

“…Their findings yield consistent weak results about a systematic relation between the indexes and performance. More recently, Gherghina et al (2014) reported a lack of a statistically significant relationship between ISS CGR and company value for a limited US large firms sample.…”

“…This is, to our knowledge, the second study using this specific rating. In a prior study with a limited sample of US firms, Gherghina et al (2014) reported the lack of a statistically significant relationship with the companies’ value. While our research shares some similarities with Gherghina et al (2014), unlike them, we investigate a large sample of firms from 16 European countries following a cross-regional approach.…”

“…In a prior study with a limited sample of US firms, Gherghina et al (2014) reported the lack of a statistically significant relationship with the companies’ value. While our research shares some similarities with Gherghina et al (2014), unlike them, we investigate a large sample of firms from 16 European countries following a cross-regional approach. According to Doidge et al (2007), country characteristics explain a much larger share of the variance in governance ratings than firm characteristics.…”

“…As stated by Bebchuk and Hamdani (2009), different ownership structures demand different governance practices. Finally, while most prior research (Brown and Caylor, 2006; Daines et al , 2010; Gherghina et al , 2014) used a single indicator of performance, we use several metrics in order to report sounder results.…”

Exploring the Constructed Corporate Governance Index’s Effect on the Firm Performance and Firm Value: An Empirical Study on Service and Industrial Companies Listed in Amman Stock Exchange

“…From other side, some prior studies reported opposed results. ISS Governance QuickScore 2.0 overall rating is used by Gherghina et al (2014) that are provided by the Institutional Shareholder Services Inc. (ISS) to reflect the corporate governance practices for each and every company that is a part of S&P 100 Index. Therefore, only the companies involved in the financial sector were left as an exception.…”