Corporate Governance Ratings and Firm Performance: Canadian Evidence

Abstract

This paper examines the relationship between corporate governance ratings and firm performance using two commercial governance ratings- the Globe and Mail Report on Business (ROB) rating and the Institutional Shareholder Services (ISS) Governance Quickscore. Firm performance is measured as Return on Assets (ROA), Return on Equity (ROE), Tobin’s Q and Market – to – Book (MB) ratio. For the ROB ratings, a panel data of 119 firms in the three-year period 2010-2012 was analyzed using univariate and multivariate analysis. The ISS rating for the same firms was examined using Ordinary Least Squares (OLS). The univariate analyses show differences in performance change between good governance and poor governance firms for Tobin’s Q and MB ratio. There is also evidence of a difference in MB ratio between high governance risk and low governance risk firms for the ISS rating. The multivariate analyses show significant positive relationship between the sub categories of ROB ratings and firm performance measures; there is however no evidence for the overall score. For the ISS rating, there is evidence that high governance risk firms perform lower than low governance risk firms. Also, there is evidence of some significant relationship between the sub-category scores and firm performance. This study contributes to literature by using a new data source of governance ratings for Canadian firms – ISS and provides more evidence that the sub-category ratings reflect firm performance better than the overall scoring. The results of this study are important to investors, companies and policy makers.