An Empirical Examination of the Relationship between Corporate Governance Ratings and Listed Companies’ Performance

This study examines the relationship between corporate governance ratings and firm performance, including both a global measure of corporate governance and four sub-indices corresponding Audit, Board Structure, Shareholder Rights and Compensation, provided by Institutional Shareholder Services (ISS). The corporate governance ratings represent a proper approximation of the quality of corporate governance practices from inside the companies. This fact determines the investors which seek to hold shares in certain companies for a long term to be interested in the quality of corporate governance practices related to those companies. Using the cross-sectional multiple linear regression model for a random sample of 155 U.S. companies listed at New York Stock Exchange, NASDAQ and NYSE Amex Equities, belonging to twenty industries, in 2011, our research emphasizes a negative relationship between corporate governance global rating and firm performance. Also, we find a negative relationship between corporate governance sub-indices and firm performance, with some exceptions. However, when we removed the companies from financial and real estate sectors, respectively 29 companies, resulting another sample of 126 companies, the results support the same findings. This study reveals that the commercial corporate governance ratings, like Governance Risk Indicators (GRId), provided by Institutional Shareholder Services (ISS) are affected by measurement errors. This research is important to the shareholders and investors globally, who are using commercial corporate governance ratings, in order to identify and quantify the risks of their investments. Our study suggests that shareholders and investors should not base entirely on commercial corporate governance ratings in their investment decisions, because they couldn’t take the proper investment decision each time.