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The determinants and effects of commercial corporate governance analysis

Student thesis: Doctoral ThesisDoctor of Philosophy

This thesis provides novel insights into the role of corporate governance analysts. These information intermediaries, such as Institutional Shareholder Services (ISS), provide a wide range of services to market participants, including corporate governance data, analysis, ratings, proxy recommendation, and consulting. They have been criticized for their alleged excessive influence over investor decisions, the low quality of their services, and potential conflicts of interest inherent in their business model. Despite the attention of academics and regulators, whether these analysts provide valuable and unbiased corporate governance information is still an open question. Therefore, based on two empirical studies (in paper format), this thesis explores the information content of one of their key services: corporate governance ratings. The first paper demonstrates governance analysts’ influence over market participant decisions by showing large negative stock market reactions around their rating downgrade announcements. Stock returns are more negative for firms with higher agency problems and highly correlated with the analyst’s proprietary analysis, consistent with ratings providing new and relevant information on corporate governance quality. The second paper examines whether governance ratings by ISS were biased towards client firms during the recent financial crisis, a period in which conflicts of interest were magnified and the pressure for ISS to bias upwards client ratings may have been substantial. By using proprietary data, this paper finds that ISS governance ratings were not biased. In particular, it shows that ISS was not changing its weighting model or adjusting the final ratings to benefit client firms. Overall, these findings suggest that governance analysts provide new and unbiased information on governance quality that market participants find relevant. Therefore, regulation would impose unnecessary costs on firms that appear to provide a useful unbiased service.
Original languageEnglish
Awarding Institution
Award date1 Mar 2020

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