Do Corporate Governance Ratings Change Investor Expectations? Evidence from Announcements by Institutional Shareholder Services*

Abstract

This paper examines empirically the announcement effect of commercial corporate governance ratings on share returns. Rating downgrades by Institutional Shareholder Services (ISS) are associated with negative returns of –1.14% over a 3-day announcement window. The returns are highly correlated with the proprietary analysis of ISS and are decreasing in agency costs, consistent with ratings providing independent information on underlying corporate governance quality. We thus show that the influence and impact of ISS extends beyond proxy recommendations and subsequent voting outcomes. Our findings contrast with the insignificant price impact of Daines, Gow, and Larcker (2010), whose analysis we replicate and successfully reconcile to ours by pooling upgrades and downgrades together.

Institutional Investors and Corporate Governance

“…Calluzzo and Dudley (2019) provide evidence that proxy voting advisors influence real outcomes through their recommendations, notably, director behavior, executive retention, and executive compensation practices. Guest and Nerino (2020) find that ISS has an effect beyond its influence via proxy recommendations and subsequent voting outcomes. Specifically, they show that downgrades in the governance ratings provided by ISS are associated with negative announcement returns of -1.14% over a three-day window.…”

To Be Rated or To Be Indexed: Corporate Governance Rating Experience in Borsa Istanbul

“…According to Daines et al (2010), commercial CGR do not provide useful information for the market in terms of share prices. Interestingly, in a very recent study, Guest and Nerino (2020) replicate the analysis of Daines et al (2010) and come up with contrasting findings with significant price impact of CGR in the case of downgrades in particular. Black et al (2014) argue that probable reasons for this inconclusiveness in the CGR literature are construct invalidity, data unavailability and omitted variable bias.…”

Boosting Foreign Investment: The Role of Certification of Corporate Governance

“…Nonetheless, spurred by the increasing demand for information on environmental, social, and governance (ESG) performance, this literature has recently evolved toward the study of commercial ratings. Although some authors find that these ratings contain value‐relevant information (Lehman [2019], Guest and Nerino [2020]) other recent papers point out several issues: disconnect between ratings and governance‐related outcomes (Daines, Gow, and Larcker [2010]), substantial disagreement among the assessments of different rating agencies (Berg, Fabisik, and Sautner [2020], Christensen, Serafeim, and Sikochi [2022]), and rewriting of data (Berg, Fabisik, and Sautner [2020]).…”