Thirty Years of Corporate Governance: Determinants and Equity Prices

Abstract

In this paper, we introduce a comprehensive corporate governance database starting in 1978 for approximately 1,000 firms tracking whether they had any of the 24 corporate governance provisions tracked by the IRRC (and which form the G-Index) as well as a number of other corporate governance variables. We document that most corporate governance changes occurred in the 1980s, not the 1990s. We find little evidence for reverse causation, i.e. low-value firms adopting a higher G-Index. An important determinant of firms' corporate governance changes was M&A activity with friendly and LBO merger waves being important determinants. Moreover, higher G-Index and E-Index scores are associated, even with firm fixed effects, with lower firm value with much of that lower firm value occurring for firms in industries that are subject to a merger wave. We also document that poison pills and classified boards appear to be more harmful to firm value after the poison pill was judicially approved in 1985. Finally, we document that a higher G-Index or higher E-Index is robustly associated for the 1978-2006 period with lower returns, even adjusting for industry as in Johnson, Moorman and Sorescu (2008).