Study On The Dynamic Effects Of Governance Premium And Response Behavior Of Listed Companies

The study of corporate governance is concerned with reducing agency costs and ensuring that investors receive appropriate returns on their investment in the capital market,particularly in the context of separation of ownership and management.The premium of corporate governance refers to the phenomenon of high-quality governance companies in the capital market having excess returns or higher market valuation.The premium of corporate governance reflects investors’ level of understanding of corporate governance and their ability to distinguish between good and poor governance companies.The ability of high-quality governance companies to obtain high valuations in the market is an important driving force for listed companies to provide good governance.The corporate governance premium may vary with different investors’ levels of understanding in different market periods,and companies may respond differently to governance premiums at different levels.Therefore,studying the dynamic effects of corporate governance premiums and the response behavior and mechanisms of listed firms to different levels of the corporate governance premium is of great significance to improving China’s corporate governance premium level and optimizing the governance practice of China’s listed companies.This dissertation first develops a dynamic theory model of the dynamic effects of corporate governance premiums based on the impact of corporate governance on equity value,and subsequently,constructs different response models of listed companies’ governance behavior at different premium levels.Based on theoretical modeling and literature analysis,this dissertation proposes a dynamic evolution framework for corporate governance premiums based on investors’ cognitive processes of corporate governance,and then verifies the framework in the Chinese capital market.Due to the varying premiums of corporate governance at different times,there exists a dynamic response process in listed companies’ supply strategy for high-quality governance.This dissertation subsequently analyzes the response behavior of listed companies’ governance behavior from the perspectives of corporate governance premium appearance and corporate governance abnormal return disappearance in the Chinese and US markets,respectively.Specifically,this dissertation analyses the characteristics and mechanisms of listed companies’ governance response in the period before corporate governance premiums appeared and the period after corporate governance premiums appeared in the Chinese market,as well as the characteristics and mechanisms of listed companies’ governance response in the period of partial to full corporate governance premiums in the US market.The main findings of this study are summarized as follows:Firstly,this dissertation constructs a theoretical model of equity value and dynamic corporate governance premium based on agency cost theory to address the inconsistent performance of corporate governance premiums in different markets and different stages within the same market.It proves that the reason for corporate governance premiums is that corporate governance can affect equity value,and investors’ awareness of this impact varies over time.In response to the characteristics of listed companies’ governance behavior under different premium levels,multiple response models are constructed,including a theoretical model in which informal governance factors promote good governance practices during the period when there is no premium on corporate governance,a governance behavior complement response model for listed companies with weaker constraints from informal governance during the partial premium period,and a governance behavior convergence response model for listed companies during the full premium period.The models demonstrate the different reasons for listed companies’ governance response behavior during different governance premium periods.Furthermore,based on the dynamic relationship between corporate governance and excess returns or company valuations,a three-stage dynamic framework for the evolution of corporate governance premiums based on investor cognition is proposed.Based on this framework,the Chinese and American markets are selected to analyze the response behaviors and response mechanisms of listed companies in different stages of the dynamic effect of governance premium from a theoretical perspective.Secondly,this dissertation tests the dynamic effects of corporate governance premiums based on the Chinese market.Chapter 4 of this paper constructs a multiindicator long-term company governance index called CCG-Index.Using the quantile regression model,this dissertation finds that companies with high levels of CCG-Index can have higher net profit margins and sales growth than those with lower levels of CCG-Index,demonstrating the effectiveness of the corporate governance index constructed.By constructing long and short portfolios based on the CCG-Index,the dissertation finds that during the early stages when investors lack an understanding of corporate governance,there are no excess returns generated by the investment,and as investors’ understanding deepens,the investment strategy begins to produce stable excess returns,demonstrating that the information related to corporate governance is continually integrated into stock prices.Moreover,the long and short investment portfolios based on the CCG-Index perform better in bear markets,indicating that excellent governance companies are more resilient to market suppression.Using crosssectional regression models,the dissertation finds that there is a dynamic effect between CCG-Index and company valuation variables,with the relationship evolving from non-correlation to a stable correlation,and more slowly than the long and short portfolio that generates excess returns based on the CCG-Index.The results confirm that the information related to corporate governance is first reflected in excess returns and gradually integrated into the current valuation of the company’s stock as investor awareness deepens,thus verifying the company governance premium’s dynamic evolution framework based on investor cognition.Thirdly,based on the Chinese market,this dissertation tests the heterogeneity of the dynamic effects of corporate governance premiums.Chapter 5 of this dissertation studies the dynamic effects of corporate governance premium under different conditions,such as turnover rate of investors,ownership structure of companies,proportion of institutional investors,dividend yield level,and company size,revealing the more detailed patterns of the evolution of corporate governance premium.Under multiple regression models with cross-sectional data and with the long and short portfolio strategy based on CCG-Index,this dissertation finds that corporate governance premium evolves more rapidly and more significantly in companies with longer investment horizons,more institutional investors,higher dividend yields,and larger size.This study confirms the positive role of long-term investors,institutional investors,dividends,and company size in the perception and evolution of corporate governance in the market,thus expanding the research boundary of their influence on the market perception of corporate governance.Fourthly,this dissertation investigates the response behavior and mechanisms of listed companies in China based on the perspective of the manifestation of corporate governance premium.Chapter 6 empirically verifies the presence of corporate governance premium by constructing annual cross-sectional regression models.The panel regression model and logistic regression model are employed to find that,even when corporate governance is not priced during the early stage of the capital market,some companies are willing to provide good corporate governance due to the presence of informal institutional constraints or the positive externalities of other stakeholders.Specifically,companies located in regions with high social trust,those affiliated with company groups,and those with higher brand value had better governance practices,such as higher operating efficiency,lower expense ratios,and fewer instances of controlling shareholders’ embezzlement or violations.As negative events accumulate in the market due to poor governance and investors become dissatisfied with the consequences,the regulatory authorities introduce corporate governance reforms,such as split share structure reform to resolve non-tradable shares and other receivables reform to limit controlling shareholders’ embezzlement.Using the Staggered DID model,the study finds that companies with weaker social trust constraints tend to respond with greater governance improvement during the split share structure reforms and obtain higher valuation gains.However,the split share structure reform does not effectively solve the problem of controlling shareholders’ embezzlement.The Logistic regression model further finds that companies with severe controlling shareholders’ embezzlement are less willing to respond to corporate governance reforms,as evidenced by their slower response to independent director reforms.The standard DID model shows that companies with fewer informal institutional constraints or constraints from other stakeholders are more likely to exhibit the characteristics of supplementing responses to corporate governance reforms aimed at controlling controlling shareholders’ embezzlement.Finally,this dissertation analyzes the response behavior and mechanisms of listed companies based in the US based on the perspective of the disappearance of corporate governance abnormal returns.Chapter 7 of this dissertation constructs a corporate governance index based on the strength of anti-takeover provisions in corporate articles,and empirically tests the disappearance of the corporate governance abnormal returns in the US stock market by creating long-short investment portfolios based on the corporate governance index.By establishing a quantile regression model,the study finds that listed companies with better corporate governance ratings have higher operational performance,such as better net profit margins,return on equity,and return on assets,indicating the effectiveness of the constructed corporate governance index.Through testing the response strategy of the corporate governance index,it is found that companies with excellent governance ratings respond by introducing new antitakeover provisions,showing a relaxation of governance ratings,while companies with poor governance ratings give up some governance provisions that are detrimental to shareholder rights,showing an optimization of governance ratings.The governance of listed companies shows a trend towards centrism.This dissertation further explores the response mechanism of corporate governance behavior towards centrism evolution in the US stock market.Regarding the mechanism by which companies with better governance ratings relax their ratings,it is found through the construction of a fixedeffect regression model that when there are more professional corporate legal practices and commercial judgment rules or when management is more aligned with shareholder interests,giving management more power to deal with more complex business environments and increase shareholder value.Specifically,when the management and board hold a higher proportion of shares,long-term institutional investors hold more stocks,or the company is faced with a more competitive environment,relaxing governance ratings gives management more power and will improve the market valuation of the firm.With respect to the mechanism by which companies with poor governance ratings optimize their rating,it is found through the construction of a fixedeffect regression model that improving governance ratings contributes to the increase of corporate value,and the main driving force behind optimization of governance ratings is the pressure from the media and external markets.Under external pressure,companies with poor governance ratings usually abandon some controversial governance provisions that favor management power to optimize governance ratings,such as abandoning poison pill plans.In summary,this dissertation analyzes corporate governance premium from theoretical and empirical perspectives and explains the possible reasons for the inconsistent research findings on corporate governance premium,while also revealing that China’s corporate governance premium level still lags behind that of developed markets.The study also investigates the response behavior of listed companies in China and the US in different stages of corporate governance premium and finds the supplement and convergence characteristics of corporate governance behavior.Based on these findings,this dissertation puts forward policy and management recommendations to promote the high-quality development of the capital market,such as improving the level of corporate governance premium,optimizing the role of informal governance,paying attention to new forms of controlling shareholders’ embezzlement,accelerating the framewoark and legislation of the market for corporate control,and enhancing the ability of listed companies to optimize corporate governance premium.