USA: the predictive qualities of corporate governance ratings

Recent research published by academics at Stanford University's Rock Center for Corporate Governance has considered the predictive ability of corporate governance ratings. The authors report:

"The providers of the ratings make strong claims regarding the ratings’ value in predicting future bad outcomes (such as accounting restatements or shareholder suits) and firm performance. These ratings, often provided by proxy advisors, are also used in formulating recommendations that can be influential in shareholder voting. We provide the first independent assessment of four prominent commercial corporate governance ratings. Prior evidence on individual ratings has generally been backward-looking, raising the distinct possibility that the ratings reflect past firm performance but are unable to predict  accounting restatements, litigation, and future performance. We examine the ability of ratings produced by Audit Integrity, RiskMetrics (previously Institutional Shareholder Services), GovernanceMetrics International, and The Corporate Library to predict future performance. With the possible exception of ratings by Audit Integrity, we find that most ratings have either limited or no success in predicting firm performance or other outcomes of interest to shareholders".

For further information see:
Research article | Abstract | Rock Center home page |