Author(s)

Xutian Yao

Corresponding Author

Xutian Yao

ABSTRACT

More attention has been paid to corporate governance of listed companies, and the level of corporate governance can reflect the profitability of the firm well. However, few scholars add corporate governance index into asset pricing model in previous studies. In this paper, the question of whether combining corporate governance index and Fama-French three factor model can better interpret the excess return of the stock portfolios is interpreted and which portfolio is the most sensitive to corporate governance level is explored. Data are selected from all NYSE, AMEX, and NASDAQ stocks with complete corporate governance information from 2011 to 2020. Principal component analysis is used to construct corporate governance index by measuring the board of directors, audit committee, and compensation and nomination committee. The empirical results indicate that the extended model’s R-squared is better than the original Fama-French three-factor model. It is found that the regression coefficient of the corporate governance factor is positive and significant in medium book-to-market value portfolios. In addition, big size portfolios are more sensitive to corporate governance level than small size. Based on this, this paper analyzes the reason for this and discuss the information disclosure, and provides a better method to predict excess return.

KEYWORDS

Corporate governance, Fama-French three-factor model, principal component analysis, board of directors, audit committee