C. S. Agnes Cheng
University of Houston
Denton Collins
The University of Memphis
Henry Huang
University of Houston
Abstract: This paper presents an empirical analysis of the capital market effects of the October 15, 2002 release of the Standard & Poors Transparency & Disclosure (T&D) study. The authors of the S&P study identified three dimensions of corporate governance attributes that are used by S&P in their systematic assessments of the strength of individual firmsÂ’ corporate governance mechanisms. These dimensions are ownership structure and investor rights, financial transparency and information disclosure, and board and management structure and process. The study included a ranking of 460 of the S&P 500 firms along these three dimensions. We investigate the effects of the level of these rankings and the differential rankings between composite and annual report rankings on three market metrics: market beta, risk-adjusted abnormal returns and earnings response coefficients surrounding the announcement date. Thus, our paper contributes to the corporate governance literature by examining the usefulness of the S&P T&D rankings and the influence of corporate governance on shareholdersÂ’ wealth. Assuming that these rankings measure the strength of corporate governance, we draw the following conclusions: 1) stronger corporate governance (especially stronger board structure and process) reduces firm risk; 2) S&P T&D rankings provide new information on corporate governance attributes, and the market responds favorably during the event period to firms with stronger corporate governance; 3) stronger corporate governance leads to higher earnings quality; and 4) different corporate governance dimensions have different effects on market metrics.
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