Post by Sapphire Capital on Sept 9, 2008 21:56:21 GMT 4
Rating the Ratings: How Good are Commercial Governance Ratings?
Robert Daines
Stanford Law School
Ian D. Gow
Stanford Graduate School of Business
David F. Larcker
Stanford University
June 26, 2008
Stanford Law and Economics Olin Working Paper No. 360
Abstract:
Proxy advisory and corporate governance rating firms play an increasingly important role in U.S. public markets. Proxy advisory firms provide voting recommendations to shareholders on proxy proposals and sometimes take an active role persuading management to change governance arrangements. Corporate governance rating firms provide indices to evaluate the effectiveness of a firm's governance and claim to be able to predict future performance, risk, and undesirable outcomes such as accounting restatements and shareholder litigation. We examine these claims for the commercial corporate governance ratings produced for 2005 by Audit Integrity, RiskMetrics (previously Institutional Shareholder Services), GovernanceMetrics International, and The Corporate Library. Our results indicate that the level of predictive validity for these ratings are well below the threshold necessary to support the bold claims made for them by these commercial firms. Moreover, we find no relation between the governance ratings provided by RiskMetrics with either their voting recommendations or the actual votes by shareholders on proxy proposals.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1194978_code445373.pdf?abstractid=1152093&mirid=2
Robert Daines
Stanford Law School
Ian D. Gow
Stanford Graduate School of Business
David F. Larcker
Stanford University
June 26, 2008
Stanford Law and Economics Olin Working Paper No. 360
Abstract:
Proxy advisory and corporate governance rating firms play an increasingly important role in U.S. public markets. Proxy advisory firms provide voting recommendations to shareholders on proxy proposals and sometimes take an active role persuading management to change governance arrangements. Corporate governance rating firms provide indices to evaluate the effectiveness of a firm's governance and claim to be able to predict future performance, risk, and undesirable outcomes such as accounting restatements and shareholder litigation. We examine these claims for the commercial corporate governance ratings produced for 2005 by Audit Integrity, RiskMetrics (previously Institutional Shareholder Services), GovernanceMetrics International, and The Corporate Library. Our results indicate that the level of predictive validity for these ratings are well below the threshold necessary to support the bold claims made for them by these commercial firms. Moreover, we find no relation between the governance ratings provided by RiskMetrics with either their voting recommendations or the actual votes by shareholders on proxy proposals.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1194978_code445373.pdf?abstractid=1152093&mirid=2