Are good-governance stocks a wise investment?

Abstract

I test whether long-short corporate governance strategy (long good-governance stocks and short poor-governance stocks) generates abnormal returns in the stock exchange of Thailand. The results based on equal-weighted portfolios show abnormal returns in both extreme (long highest-governed firms and short lowest-governed firms) and non-extreme (long higher-governed firms and short lower-governed firms) strategies. I find that the global financial crisis from 2007 to 2009 contributes to such abnormal returns, implying that the strategy is related to a flight to quality, the situation in which investors reallocate their investments from high-risk assets to safe assets. Results are robust among different asset pricing models. Moreover, I find that investors are insensitive to change in corporate governance scores, a fact which may impede a firm’s incentive to improve its governance level.