Stock Price Informativeness and Corporate Governance: An International Study

Abstract

This study investigates the cross-country relationship between firm-level corporate governance and stock price informativeness. Using firm-level data from 22 developed countries, we find that stock price informativeness, as measured by firm-specific stock return variation and future earnings response coefficients, increases with the quality of a firm's corporate governance. Further analyses show that all mechanisms except board-related governance relate positively to stock price informativeness. Finally, firm-level corporate governance plays a more significant role in strengthening the stock returnearnings associations for firms in countries with strong institutional environments. This evidence highlights the role of country-level legal investor protections in shaping the relationship between firm-level corporate governance and stock price informativeness.

Corporate Governance, Companies’ Disclosure Practices and Market Transparency: A Cross Country Study

“…Following Doidge et al. () and Yu (), we use the ratio of stock market capitalisation to Gross Domestic Product [GDP] ( Stkmkcap ) to proxy for stock market development. Higher values of Stkmkcap are associated with greater stock market development.…”

“…Our paper is related to Yu (2011), who investigates share price informativeness by evaluating stock return variation and earnings response coefficients for 22 countries for the period 2002 to 2005. Yu finds there is greater informativeness for bettergoverned firms, irrespective of the legal origin of the country.…”

“…Yu () uses seven of the ISS CG characteristics in her measure of CG as shown in Appendix Table , Panel B. Our measure, based upon the items included in Chung et al.…”

Association between Board Characteristics and Earnings Quality: Malaysian Evidence

“…The untabulated results indicate that even though the coefficient of BDI is positive, the board of director index is not statistically related to earnings persistence, earnings predictability and earnings informativeness. However, these findings are not surprising as the board practices incorporated in the index and their related weights are arbitrary (Klein, Shapiro & Young 2005;Yu 2011). Therefore, the index may miss the actual source and magnitude of board effects on earnings quality.…”

“…Corporate governance researchers argue that a composite index can capture the actual capability of corporate governance practices to enhance earnings quality (e.g., Gul et al 2011;Jiang & Anandarajan 2009;Lara, Osma & Penalva 2007;Pergola & Joseph 2011;Yu 2011). It has also been argued that traditional measures of mechanisms of the board of directors (i.e., board independence, board size, CEO duality, and board expertise) do not guarantee effective monitoring of the board as these mechanisms complement each other and any attempt to individually assess their quality is not appropriate (Connelly, Limpaphayom & Nagarajan 2012;Lara et al 2007).…”