Empirical Evidence on Corporate Governance in Europe: The Effect on Stock Returns, Firm Value and Operating Performance

Bauer Rob, Guenster Nadja, Otten Roger

Abstract
This paper analyses whether good corporate governance leads to higher common stock returns and enhances firm value in Europe. Throughout, this study uses Deminor Corporate Governance Ratings for companies included in the FTSE Eurotop 300. Following the approach of Gompers et al. (2003, 'Corporate Governance and Equity Prices', Quarterly Journal of Economics, 118, 107-55), portfolios are built consisting of well-governed and poorly governed companies and their performances are compared. The impact of corporate governance on firm valuation is also examined. The results show a positive relationship between these variables and corporate governance. This relationship weakens substantially after adjusting for country differences. Finally, the relationship between corporate governance and firm performance is analysed, as approximated by net profit margin and return on equity. Surprisingly, and contrary to Gompers et al. (2003), a negative relationship is found between governance standards and these earnings-based performance ratios for which possible implications are discussed.

Keywords
corporate governance; asset pricing; equity returns; firm value; performance attribution; profitability ratios