Corporate Governance and Corporate Performance Dispersion

This study, using a fixed effects model, empirically investigates the relationship between corporate governance and corporate performance dispersion. Suggesting a negative relationship, [1] theorize that when corporate governance improves there is a decrease in shareholder oversight which could permit greater managerial discretion to execute conservative investment policies leading to a decrease in corporate risk taking and hence a decrease in performance dispersion. For a positive link, [2], employing agency theory, contend that with poor corporate governance, managers may choose conservative investment policies for career preservation concerns, giving up value-enhancing risky projects. Our findings indicate that the Gompers and Bebchuk governance indices (institutional ownership) are negatively (positively) associated with the standard deviation of monthly stock returns. The results also indicate that better corporate governance is associated with higher as well as more variable capital expenditures and R&D spending. These findings are consistent with the argument that management of better governed firms behave optimally, follow more aggressive investment policies, leading to the increased dispersion of corporate performance.