Corporate governance index and market performance: evidence in the Brazilian stock market

Abstract

This study aimed to build a corporate governance index for Brazilian companies with stocks traded by the Brazil Stock Exchange and Over-the-Counter Market (Brasil, Bolsa, Balcão [B3]) to evaluate the effect of the best governance practices on their market performance, between the years 2010 and 2020. Despite the different governance indexes created for Brazilian companies, most of the empirical studies used proxies based on B3's Differential Corporate Governance Levels (DCGLs). This scenario is mainly due to difficulty in collecting data and operationalizing these indexes. This article proposes a corporate governance index that is simple to use and, therefore, more accessible when compared to other indexes documented in the literature. The creation of an effective index for assessing corporate governance quality in Brazilian companies is key, given that the influence that governance has on the financial decisions made by these companies is greater in countries with weak legal protection for investors, such as Brazil. Investors see that well-governed companies are less risky, thus they have a better chance of recouping their investments. Thus, the proposed index stands out as a major instrument of financial assessment. The proposed governance index has been supported by previous studies pointing out the most efficient mechanisms in reducing agency problems. As measures of market performance, Tobin's Q and Firm Value were used. Finally, the analysis was performed using ordinary least squares (OLS) models, panel data, and regression models using the instrumental variables approach. The proposed index proved to be a good measure of governance, given the unanimous results among the models. In all estimations, the relationship between corporate governance and market performance was positive, attesting the market confidence associated with the corporate governance quality expressed by the index.