Research Paper 08: Does it pay to own companies that do the right thing?

Does strong corporate governance lead to outperformance?

Does it pay to own companies that do the right thing? Or is it as St. Augustine famously said, “Lord, make me pure, but not yet”.

This research paper puts the moral question to one side and addresses it from a more prosaic or secular perspective by analysing whether the share prices of companies with good governance outperform the market, and by extension if poor governance is associated with underperforming share prices.

What data have Inalytics used in the analysis?

Inalytics analysed a comprehensive set of Governance Risk Ratings from a leading corporate governance advisory consultancy, to show that it pays to invest in companies that do the right thing.

We tested the proposition that the share prices of the companies with low levels of governance risk, perform better than those with high levels, as well as analysing the data in terms of the differences between large and small companies. Finally, by analysing portfolio exposures, we questioned whether some asset managers are more equal than others when assessing governance risk.

With analysis across two years of data, in our subsequent Research Paper 09: Does it pay to own companies that do the right thing? we conduct a more rigorous review across five years of data.

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