The Value Relevance Of Corporate Governance

Entering for the 21 st century, the enthusiasm to the corporate governance is not being weakened, on the contrary especially more intense than previously, regardless of in the developed countries or the developing nations. Corporate governance becomes the focal point during the course of capital market development. The corporate governance revolution emerges in the whole world economic fields with many measures being taken to ensure investors’ legitimate rights and interests. And consecutively, various corporate governance valuation systems were issued, for instance Standard & Poor corporate governance grade system(CGS), CLSA corporate governance valuation index(CGI), Deminor corporate governance rating system(CGR), Moody corporate governance assessment system(CGA), Research Center for the Studies of Corporate Governance of Nankai University China corporate governance index(CCGINK). Some countries or the local departments concerned also one after another formulated the special corporate governance disclosure policy or instruction, for example Canada, Australia, Hong Kong, the United Nations Conference on Trade & Development and so on.Exactly more and more attention being paid to the corporate governance quality of listed companies, large amount of corporate governance systems being issued and more corporate governance information being revealed, the relation between corporate governance and corporate performance being explicit, especially the cases of the fraudulent listed companies being more, it is necessary to study whether the investors have considered the corporate governance factor in the investment decision-making? If having considered, how much proportion is corporate governance factor to be able to explain the stock price? Whether we can achieve abnormal returns if investors grasp the corporate governance quality of some companies? The thesis shows solicitude for these problems.The relation between accounting earnings and stock price is already studied in positive accounting theory(PAT), which involves the three grades relation hypothesis of Beaver and the two grades relation hypothesis of Ohlson. We may establish the relation between corporate governance and stock price so long as the paper can link the corporate governance to accounting earnings. Therefore, the dissertation studies the relation between corporate governance of t year and accounting earnings of t year or t+1 year. We choose the main business profit financial index to represent accountant earnings. The empirical results show that there is lag effect of the relation between corporate governance and accounting earnings using 2002-2005 year 4032 samples balanced panel data, in another words, the corporate governance of t year is not significantly positively correlated to the accounting earnings of t year, but significantly positively correlated to the accounting earnings of t+1 year. So the thesis establish the new three grades(corporate governance of t year- accounting earnings of t+1year- dividends of t+1 year- stock price of t+1 year) and two grades(corporate governance of t year- accounting earnings of t+1year- stock price of t+1 year) relation hypothesis of the relation between corporate governance and stock price. This is the premise for the study of corporate governance disclosure information content, the relative value relevance and incremental value relevance, and the corporate governance premium.Firstly, using event study method based on the informative perspective, the dissertation studies the market reaction of annual corporate governance disclosure, this answers the question whether corporate governance disclosure affects stock price. The sample number is 198 of 2003, 195 of 2004 and 174 of 2005. The findings indicate that, the annual corporate governance disclosure is informative; the information content of the good corporate governance samples(Top 100) and bad corporate governance samples(Low 100) is significantly different; the reaction time and depth of these two groups are also different in different years. The phenomena of over-reaction being popular with two groups, the investors can achieve some abnormal returns if they can appraise the corporate governance quality of some companies rightly. The capital market is not semistrong-form efficiency. This is the first innovation of the dissertation.Secondly, we adopt the price model basing on the valuation perspective to study the relations between corporate governance and stock price including the relative value relevance and incremental value relevance of corporate governance, which answers how corporate governance affects stock price. There are two kinds of models to test the value relevance including price model and return model. Each model has its own superiority and shortcomings at the same time. We chose the Ohlson price model to study the value relevance of corporate governance according to the domestic related study results. Results of 2002-2005 3976 samples balanced panel data indicate that the corporate governance of t year has relative value relevance and lower incremental value relevance; while the corporate governance of t-1 year just only has relative value relevance. The relative value relevance of corporate governance of different years demonstrates the improving trend. We also check the value relevance of corporate governance using the sub-index of corporate governance. This is second innovative content of the thesis.Finally, we use Fama-French model to study the corporate governance premium of Chinese stock market. The results of corporate governance disclosure information content indicate that the investors can achieve abnormal returns if investors know about the corporate governance after the disclosure of annual report; meanwhile, the results of corporate governance value relevance show that the investors consider corporate governance factor, but the relative value relevance of corporate governance is higher in recent 2 years. In general, investors do not completely anticipate the important role of corporate governance according to the expectation theory, or the corporate governance factor is just partially reflected in the stock price, then the corporate governance premium generates. So we imply three factors model(Fama-French model) to detect the corporate governance premium of Chinese stock market. The empirical results demonstrate that there is 8.73 percent corporate governance premium in Hu & Shen stock markets. This is the third innovative point of the paper.Robert M. Bushman and Abbie J. Smith(2001) point out future research of corporate governance will change to the market effect, namely further relates corporate governance with the stock price. The study of the relation between corporate governance and stock price will develop the research field about corporate governance and corporate performance. Therefore this topic will be significant in theory. The empirical results are beneficial to promote the corporate governance disclosure of listed companies, to improve the irrationality of investors, to issue the corporate governance stock price index, to enhance the corporate governance level of listed companies, and to raise capital market efficiency in practice.