The effects of corporate governance on the stock return volatility

Abstract

Purpose The purpose of this study is to investigate the relationship between the stock return volatility, the outside and the independent directors. Design/methodology/approach The volatility, as the dependent variable in the model, is measured by the standard deviation of annual stock returns. Concerning the independent variable is as follows: The chief executive officer (CEO) is a dummy variable denoting whether or not the chairman of the board holds the position of CEO. The INDD, which represents the independent directors, is measured according to whether the firm appoints independent directors, or by the ratio of independent directors. The FD, which represents the outside directors, is measured according to whether the firm appoints outside directors, or by the ratio of outside directors. In addition, the authors also add the following five control variables to the regression model: the certified public accountant refers to the auditor-related variables including the audit opinion and whether the firm has previously switched accounting firms. The performance (PER) represents the firm performance in terms of the relative return on assets (ROA). The turnover (TURN) is measured by the natural log of the total liabilities. The SIZE is measured by the natural log of the market value of equity, and the leverage ratio (LEV) is the firm’s debt ratio measured by the ratio of total. The TURN is measured by the natural log of the total liabilities. The SIZE is measured by the natural log of the market value of equity and the LEV is the firm’s debt ratio measured by the ratio of total debt to total assets. The sample comprises 89 firms listed on the SBF 120 index over 2006-2012. Findings Results reveal that the outside directors have a positive and significant effect on the stock return volatility. Moreover, the firm’s size and ROA have a negative effect on the stock return volatility, which is clearly evidenced in all the regressions. On the other hand, the CEO, audit size and debt ratio have statically significant and positive effects on the stock return volatility. Originality/value This study indicates the importance of corporate governance and helps investors and financial economists understand the behavior of the stock prices during a financial crisis. Although the existing studies refer to the influence of corporate governance on the stock prices during a crisis, none of these has ever discussed whether better corporate governance can help reduce the stock price volatility in such a situation.

Factors Affecting Stock Return of Manufacturing Companies in Indonesia

“…A company with a high debt to equity ratio is proven to be able to provide greater benefits for shareholders, if the company is able to use its debt effectively for the company's business development. Research by [33] also found the same results that there was a positive and significant influence between the solvency ratio on stock return. In addition, [34] also stated that there is a positive and significant influence between the solvency ratio on stock return.…”

Does corporate governance matter for stock returns volatility in the Brazilian context?

“…Taking the punctual results, the coefficients estimated from the models, we found that the IGC index presents the volatility more reactive and less persistent than the TRAD index, opposing the idea that the stocks with good governance practices are better protected from the short-term movements (Rogers and Securato, 2009;Giroud and Mueller, 2011;Huang et al, 2011;An and Zhang, 2013;Chen et al, 2013;Kim et al, 2014;Asker et al, 2015;Vo, 2015;Aloui and Jarboui, 2018). However, in the long-run, and considering the error measures, they are following the same pattern.…”

“…Therefore, poor corporate governance increases stock price volatility due to the reduction of monitory mechanism and investors' confidence in firms. A stable stock volatility is important when the investor operates in an uncertain environment, especially those who are going through some crisis as Brazil in the current decade (Aloui and Jarboui, 2018). Other factors also influence the stock volatility as ownership for foreign corporations and individuals (Chen et al, 2013) and these foreign investors have a stabilizing role in emerging stock market (Vo, 2015).…”

Corporate Governance on Share Price Performance of Big Cap Issuers During Covid-19 Pandemic

“…The elements of corporate governance use institutional ownership, independent commissioners, dual CEO positions and CEO tenure. [11] in research on the effect of corporate governance on fluctuations in stock returns during the financial crisis, it is stated that there is a relationship between independent commissioners and outside directors on fluctuations in stock returns. [12] states that there is a positive and significant relationship between corporate governance and stock returns.…”