Corporate Governance and Expected Stock Returns: Evidence from Germany


  • We thank Deutsche Börse AG, especially Rainer Riess and Georg Schattney, for valuable discussions and support in distributing the questionnaire. We thank Stefan Beiner, Tom Berglund, Wolfgang Bessler, Bernard Black, Dusan Isakov, David Raifer, Markus Schmid, Claudia B. Wöhle, the participants of the Midwest Finance Association Meeting 2003 in St. Louis, the European Financial Management Association Meeting (EFMA) 2003 in Helsinki, the Swiss Society for Financial Markets Research Meeting 2003 in Zurich, the German Finance Association Meeting 2003 in Mainz and seminar participants at the University of Geneva and the University of Illinois at Urbana-Champaign for valuable comments. Financial support from the National Center of Competence in Research ‘Financial Valuation and Risk Management’(NCCR FINRISK) is gratefully acknowledged. The NCCR FINRISK is a research program supported by the Swiss National Science Foundation.


Recent empirical work shows evidence for higher valuation of firms in countries with a better legal environment. We investigate whether differences in the quality of firm-level corporate governance also help to explain firm performance in a cross-section of companies within a single jurisdiction. Constructing a broad corporate governance rating (CGR) for German public firms, we document a positive relationship between governance practices and firm valuation. There is also evidence that expected stock returns are negatively correlated with firm-level corporate governance, if dividend yields are used as proxies for the cost of capital. An investment strategy that bought high-CGR firms and shorted low-CGR firms earned abnormal returns of around 12% on an annual basis during the sample period.