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Abstract

In this paper, we construct a corporate governance Index (G-index) based on 13 attributes, which are associated with good and bad governance to investigate the impact of corporate governance on a firm’s stock return. After correlating each of the governance attributes of 141 Tehran Stock Exchange listed companies with their performance separately over a period of six years, we find the direction of each attribute’s correlation. After that, we compute the G-index by aggregating the individual attributes and converting each firm’s scores on attribute into the same scale. Finally, these scores are summed up by subtracting negatively correlated attributes from positively correlated attributes for each firm. We find a significantly high correlation between the firm’s performance and firm’s G-index. In the next step, we made three governance-sorted portfolios – from low to high governance - which we use to evaluate stock returns. We find better-governed portfolios significantly outperformed the poorly governed portfolios. We find that corporate governance score really matters in since the results show statistically significant relationship between the qualities of the corporate governance as measured by our G-index and firm’s stock return.

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