Essay on The Impact Of Corporate Governance Related Factors On Stock Returns

Essay on The Impact Of Corporate Governance Related Factors On Stock Returns

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This thesis has examined the impact of corporate governance-related factors on stock returns. Corporate governance refers to the system of principles, policies, procedures, and clearly defined responsibilities and accountabilities used by stakeholders to overcome the conflict of interests inherent in the corporate form. It influences how the objectives of the company are set and achieved, how risk is monitored and assessed, and how firm performance is optimised. There is no doubt that what ultimately matters for firms is whether corporate governance affects corporate performance. Specifically, this thesis contributed to the existing body of literature by providing an in-depth understanding of the effect of CEO incentive pay, discretionary accruals, and technical efficiency change on stock returns in Australia.
Among various governance mechanisms, compensation policy has been argued to be one of the most important factors in organisational success because it helps align interests of managers to those of shareholders. The notion is that effective compensation policies, particularly incentive-based pay, induce managers to exert costly effort to increase their firms ' value. In addition, closely linking firm performance with CEO rewards by granting stock options should address the risk aversion of managers and incentivize them to undertake risky and shareholder-wealth-increasing investments that
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they would otherwise avoid. On the other hand, based on the managerial power approach, some argue that executive compensation is not only a potential instrument for addressing the agency problem but also a part of the agency problem itself. For example, Benmelech et al. (2010) argue that in a model with asymmetric information, stock-based ...


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... may lead to shareholder wealth losses from activities such as overinvestment and value-destroying mergers and acquisitions (Cooper et al., 2014). Second, stock-option features differ substantially across countries. For instance, performance-based vesting conditions have traditionally been uncommon in the US, although they are widespread in Australia. Such performance thresholds might encourage CEOs to work harder to meet thresholds, therefore resulting in a positive association between incentive pay and stock performance. Finally, with the introduction of the best corporate governance practice recommendations in 2003 and CLERP 9 in 2004, shareholders have an increased input into the remuneration process by way of a non-binding vote on the Remuneration Report. As a result, it is expected that there is a close link between managerial compensation and future firm value.

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- This thesis examines the impact of corporate governance-related factors, particularly CEO incentive compensation, discretionary accruals and firm technical efficiency improvement, on stock returns in Australia. The motivation to investigate these impacts was the increasing importance of the equity-based compensation component in CEO remuneration packages, the numerous financial reporting scandals at high profile companies such as Enron, WorldCom and HIH Insurance, and an urgent call from the government on improvement in productivity....   [tags: Corporate governance, Management, Investment]

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