How Does Corporate Governance Affect Equity Volatility? Worldwide Evidence and Theory

Forthcoming in The Review of Corporate Finance Studies

76 Pages Posted: 30 Jul 2018 Last revised: 31 Jan 2023

See all articles by Louis Gagnon

Louis Gagnon

Queen's University - Smith School of Business

Alexandre Jeanneret

UNSW Business School

Date Written: January 12, 2023

Abstract

We investigate the causal impact of corporate governance on equity volatility in a quasi- natural experimental setting, exploiting the staggered passage of governance reforms in the past 25 years. Using a sample of 33,831 firms from 48 countries, we find that equity volatility drops by one-fifth following the passage of reforms that increase board independence. This effect is driven by an adjustment in fixed operating costs as managerial expropriation decreases, rather than by changes in firms’ investments, profitability, asset risk, or financing decisions. We rationalize these findings with a model where minority shareholders are subject to sticky managerial expropriation.

Keywords: Equity volatility, agency conflicts, corporate governance, governance reforms, asset pricing.

JEL Classification: G12, G32, G34

Suggested Citation

Gagnon, Louis Joseph and Jeanneret, Alexandre, How Does Corporate Governance Affect Equity Volatility? Worldwide Evidence and Theory (January 12, 2023). Forthcoming in The Review of Corporate Finance Studies, Available at SSRN: https://ssrn.com/abstract=3222818 or http://dx.doi.org/10.2139/ssrn.3222818

Louis Joseph Gagnon (Contact Author)

Queen's University - Smith School of Business ( email )

Kingston, Ontario K7L 3N6
Canada
613-533-6707 (Phone)
613-533-2321 (Fax)

Alexandre Jeanneret

UNSW Business School ( email )

Sydney, NSW 2052
Australia

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