Corporate Governance Scores and Firm Performance

Abstract

The recent spate of corporate governance scandals has led to the emergence of several commercial governance rating agencies which rate firms on their strength of governance mechanisms. In this paper, we examine the quality of governance scores offered by one such vendor, The Corporate Library Board Analyst Ratings (BAR). In terms of content, we find that the percentage of independent directors, percentage of independent directors in the committees, director tenure, director age, number of directorships held by each director, independent director ownership and CEO compensation are important determinants of these ratings. Most of the factors used by BAR are consistent with the extant corporate governance theory and evidence. However, the Board Analyst Ratings fail to predict the future operating performance and stock returns of rated firms. Using a broader range of governance mechanisms, we construct an alternative score for governance which is linked to the future operating performance of firms. Overall, our results raise questions about the usefulness of BAR governance ratings to investors.