TY - JOUR AU - Gompers,Paul A. AU - Ishii,Joy L. AU - Metrick,Andrew TI - Corporate Governance and Equity Prices JF - National Bureau of Economic Research Working Paper Series VL - No. 8449 PY - 2001 Y2 - August 2001 UR - http://www.nber.org/papers/w8449 L1 - http://www.nber.org/papers/w8449.pdf N1 - Author contact info: Paul Gompers Harvard Business School Baker Library 263 Soldiers Field Boston, MA 02163 Tel: 617/495-6297 Fax: 617/496-8443 E-Mail: pgompers@hbs.edu Joy Ishii Stanford Graduate School of Business Littlefield 252 518 Memorial Way Stanford, CA 94305 Tel: 650-724-6376 Fax: 650-725-0468 E-Mail: ishii_joy@gsb.stanford.edu Andrew Metrick Yale School of Management 135 Prospect Street P.O. Box 208200 New Haven, CT 06520 Tel: 203/432-3069 E-Mail: metrick@yale.edu AB - 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. ER -