Governance Measures

Measures

Key: Measure - Build - Sources - Paper

Notes: Each paper seems to use one of three indices, the GIM, E (from BCF), or ATI index (from CN 2005), as a measure of corporate governance. The GIM & E indices are much more commonly cited than the ATI index. Most papers also exclude companies with dual-class shares because GIM did that originally. The IRRC data for individual firms' corporate governance provisions is found in its Corporate Takeover Defenses Rosenbaum 1990, 1993, 1995, 1998, 2000, 2002. 2002 is the most recent year the IRRC

• Corporate Governance (anti-takeover provision or ATP) Indices - Gompers et al 2003 (GIM) uses 24 IRRC antitakeover provisions & adds one point to index for each provision that enhances managerial power and is available 1990-2002 with sample size 11,736. Bebchuk et al 2009 (BCF) takes only 6 of those provisions for its entrenchment index (staggered boards, limits to shareholder bylaw amendments, limits to shareholder charter amendments, supermajority requirements for mergers, poison pills, and golden parachutes) and is available 1990-2002 with sample size 11,736. Cremers & Nair 2005 develops the alternative takeover protection index (ATI) which focuses on only three key antitakeover provisions (the presence of staggered boards, poison pills, and restrictions on shareholder voting to call special meetings or act through written consent - SDC M&A Database, acquirer has financial info thru Compustat and CRSP Daily Stock Price & Returns File, acquirer is included in Investor Responsibility Research Center (IRRC) of antitakeover provisions - Masulis et al 2011
• GIM Difference - Target GIM index less Bidder GIM index - IRRC, SDC, Compustat, CRSP - Wang et al 2009
• TCL (The Corporate Library) Benchmark Score - The benchmark score is based on the following criteria: whether the board is classified, whether the outside directors constitute a majority on the board, whether the board has an independent chairman or lead director, whether the audit committee consists of only independent directors, whether the board has adopted a formal governance policy, number of directors with more than fifteen years tenure, number of directors who serve on more than four boards, number of directors older than seventy years old, and CEO compensation structure. The index ranges from a feasible low of 0 to a high of 100. - The Corporate Library (TCL) available 2001-2003 Sample size of 4168 - Bhagat & Bolton 2008
• BC GovScore - Fifty-two firm characteristics and provisions are used to assign a score to each firm. The feasible range of scores is from 0 to 52. A high score is associated with better corporate governance. - The GovScore is constructed from data compiled by Institutional Shareholder Services ("ISS"), as described in Brown, Caylor (2004). available in 2002 with sample size 1,003 - Bhagat & Bolton 2008
• Board independence - The number of unaffiliated independent directors divided by the total number of board members. In some cases, we use the INDEP measure from Bhagat, Black (2001). - This measure is constructed from data provided by IRRC and TCL. available 1996-2003 sample size 9,317 - Bhagat & Bolton 2008
• Median director dollar value ownership - The dollar value of the stock ownership / voting power is calculated for all directors. We take the median director's holdings as the governance measure as this individual can be viewed as having the 'swing' vote in governance related matters. - Data from IRRC and TCL available 1998-2002 sample size 6,126 - Bhagat & Bolton 2008
• Median director percent value ownership - The percentage ownership of the firm's total voting power is calculated for all directors. We take the median director's ownership as the governance measure as this individual can be viewed as having the 'swing' vote in governance related matters. - IRRC and TCL available 1998-2002 sample size 6130 - Bhagat & Bolton 2008
• CEO chair duality - A dummy variable equal to 1 if the CEO is also the chairman of the board. - IRRC and TCL available 1998-2002 sample size 8,847 - Bhagat & Bolton 2008

General

The vast majority of papers use the GIM index or some subset of the items in the GIM index. Each index is constructed using the Investor Responsibility Research Center data from Corporate Takeover Defenses Rosenbaum 1990, 1993, 1995, 1998, 2000, 2002. I can only locate physical copies of these books, so I assume research assistants put together databases by hand using those physical copies.

In order to obtain this data, I would contact the authors of the more recent papers or the IRRC at http://irrcinstitute.org/contact/.

Papers

PDF copies of all papers found under the following directory:

• E:\McNair\Projects\Winner's Curse\Papers

Masulis et al 2011

@article{masulis2007corporate,
 title={Corporate governance and acquirer returns},
 author={Masulis, Ronald W and Wang, Cong and Xie, Fei},
 journal={The Journal of Finance},
 volume={62},
 number={4},
 pages={1851--1889},
 year={2007},
 publisher={Wiley Online Library},
 abstract={We examine whether corporate governance mechanisms, especially the market for corporate control, affect the profitability of firm acquisitions. We find that acquirers with more antitakeover provisions experience significantly lower announcement-period abnormal stock returns. This supports the hypothesis that managers at firms protected by more antitakeover provisions are less subject to the disciplinary power of the market for corporate control and thus are more likely to indulge in empire-building acquisitions that destroy shareholder value. We also find that acquirers operating in more competitive industries or separating the positions of CEO and chairman of the board experience higher abnormal announcement returns.}
}

Bebchuk et al 2009

@article{bebchuk2009matters,
 title={What matters in corporate governance?},
 author={Bebchuk, Lucian and Cohen, Alma and Ferrell, Allen},
 journal={Review of Financial studies},
 volume={22},
 number={2},
 pages={783--827},
 year={2009},
 publisher={Soc Financial Studies}
 abstract={We investigate the relative importance of the twenty-four provisions followed by the Investor Responsibility Research Center (IRRC) and included in the Gompers, Ishii, and Metrick governance index (Gompers, Ishii, and Metrick 2003). We put forward an entrenchment index based on six provisions: staggered boards, limits to shareholder bylaw amendments, poison pills, golden parachutes, and supermajority requirements for mergers and charter amendments. We find that increases in the index level are monotonically associated with economically significant reductions in firm valuation as well as large negative abnormal returns during the 1990–2003 period. The other eighteen IRRC provisions not in our entrenchment index were uncorrelated with either reduced firm valuation or negative abnormal returns.}
}

Wang et al 2009

@article{wang2009corporate,
 title={Corporate governance transfer and synergistic gains from mergers and acquisitions},
 author={Wang, Cong and Xie, Fei},
 journal={Review of Financial Studies},
 volume={22},
 number={2},
 pages={829--858},
 year={2009},
 publisher={Soc Financial Studies}
 abstract={We present evidence on the benefits of changes in control from mergers and acquisitions. We find that the stronger the acquirer's shareholder rights relative to the target's, the higher the synergy created by an acquisition. This result supports the hypothesis that acquisitions of firms with poor corporate governance by firms with good corporate governance generate higher total gains. We also find that the synergy effect of corporate governance is shared by target shareholders and acquiring shareholders, in that both target returns and acquirer returns increase with the shareholder-rights difference between the acquirer and the target.}
}

Moeller et al 2007

@article{moeller2007diversity,
 title={How do diversity of opinion and information asymmetry affect acquirer returns?},
 author={Moeller, Sara B and Schlingemann, Frederik P and Stulz, Ren{\'e} M},
 journal={Review of Financial Studies},
 volume={20},
 number={6},
 pages={2047--2078},
 year={2007},
 publisher={Soc Financial Studies},
 abstract={We examine the theoretical predictions that link acquirer returns to diversity of opinion and information asymmetry. Theory suggests that acquirer abnormal returns
should be negatively related to information asymmetry and diversity-of-opinion
proxies for equity offers but not cash offers. We find that this is the case and that,
more strikingly, there is no difference in abnormal returns between cash offers for
public firms, equity offers for public firms, and equity offers for private firms after
controlling for one of these proxies, idiosyncratic volatility.}
}

Bhagat & Bolton 2008

@article{bhagat2008corporate,
 title={Corporate governance and firm performance},
 author={Bhagat, Sanjai and Bolton, Brian},
 journal={Journal of corporate finance},
 volume={14},
 number={3},
 pages={257--273},
 year={2008},
 publisher={Elsevier}
 abstract={How is corporate governance measured? What is the relationship between corporate governance and performance? This paper sheds light on these questions while taking into account the endogeneity of the relationships among corporate governance, corporate performance, corporate capital structure, and corporate ownership structure. We make three additional contributions to the literature:
}

Gompers et al 2003

@techreport{gompers2001corporate,
 title={Corporate governance and equity prices},
 author={Gompers, Paul A and Ishii, Joy L and Metrick, Andrew},
 year={2001},
 institution={National bureau of economic research}
 abstract={Corporate-governance provisions related to takeover defenses and shareholder rights vary substantially across firms. In this paper, we use the incidence of 24 different provisions to build a 'Governance Index' for about 1,500 firms per year, and then we study the relationship between this index and several forward-looking performance measures during the 1990s. We find a striking relationship between corporate governance and stock returns. An investment strategy that bought the firms in the lowest decile of the index (strongest shareholder rights) and sold the firms in the highest decile of the index (weakest shareholder rights) would have earned abnormal returns of 8.5 percent per year during the sample period. Furthermore, the Governance Index is highly correlated with firm value. In 1990, a one-point increase in the index is associated with a 2.4 percentage-point lower value for Tobin's Q. By 1999, this difference had increased significantly, with a one-point increase in the index associated with an 8.9 percentage-point lower value for Tobin's Q. Finally, we find that weaker shareholder rights are associated with lower profits, lower sales growth, higher capital expenditures, and a higher amount of corporate acquisitions. We conclude with a discussion of several causal interpretations.}
}

Harford et al 2006

@incollection{harford2012corporate,
 title={Corporate governance and firm cash holdings in the US},
 author={Harford, Jarrad and Mansi, Sattar A and Maxwell, William F},
 booktitle={Corporate Governance},
 pages={107--138},
 year={2012},
 publisher={Springer}
 abstract={Using governance metrics based on antitakeover provisions and inside ownership, we find that firms with weaker corporate governance structures actually have smaller cash reserves. When distributing cash to shareholders, firms with weaker governance structures choose to repurchase instead of increasing dividends, avoiding future payout commitments. The combination of excess cash and weak shareholder rights leads to increases in capital expenditures and acquisitions. Firms with low shareholder rights and excess cash have lower profitability and valuations. However, there is only limited evidence that the presence of excess cash alters the overall relation between governance and profitability. In the U.S., weakly controlled managers choose to spend cash quickly on acquisitions and capital expenditures, rather than hoard it.}
}

Giroud & Miller 2011

@article{giroud2011corporate,
 title={Corporate governance, product market competition, and equity prices},
 author={Giroud, Xavier and Mueller, Holger M},
 journal={The Journal of Finance},
 volume={66},
 number={2},
 pages={563--600},
 year={2011},
 publisher={Wiley Online Library}
 abstract={his paper examines whether firms in noncompetitive industries benefit more from good governance than do firms in competitive industries. We find that weak governance firms have lower equity returns, worse operating performance, and lower firm value, but only in noncompetitive industries. When exploring the causes of the inefficiency, we find that weak governance firms have lower labor productivity and higher input costs, and make more value-destroying acquisitions, but, again, only in noncompetitive industries. We also find that weak governance firms in noncompetitive industries are more likely to be targeted by activist hedge funds, suggesting that investors take actions to mitigate the inefficiency.}
}

Cremers & Nair 2005

@article{cremers2005governance,
 title={Governance mechanisms and equity prices},
 author={Cremers, KJ and Nair, Vinay B},
 journal={The Journal of Finance},
 volume={60},
 number={6},
 pages={2859--2894},
 year={2005},
 publisher={Wiley Online Library}
 abstract={We investigate how the market for corporate control (external governance) and shareholder activism (internal governance) interact. A portfolio that buys firms with the highest level of takeover vulnerability and shorts firms with the lowest level of takeover vulnerability generates an annualized abnormal return of 10% to 15% only when public pension fund (blockholder) ownership is high as well. A similar portfolio created to capture the importance of internal governance generates annualized abnormal returns of 8%, though only in the presence of “high” vulnerability to takeovers. The complementarity effect exists for firms with lower industry-adjusted leverage and is stronger for smaller firms.}
}