In this study, we construct a corporate governance index based on several attributes known for their association with firm profitability and market value. The index is used for evaluating the performance of governance-sorted portfolios. We find that the portfolio of well-governed firms significantly under performs the portfolio of poorly governed firms. This result is essentially explained by the higher valuation of well-governed firms. After adjusting for market, size and value (book-to-market) risk factors, excess returns become insignificant across all portfolios. This appears to suggest that governance attributes are accurately reflected in stock prices. However, the period of investigation may have influenced the outcome. More research is needed before concluding to the irrelevance of corporate governance ratings for portfolio selection.
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