Use of corporate governance indices has increased in recent years, denoting a shift away from evaluating individual governance mechanisms, such as specific characteristics of a company's board of directors, says Professor
"Our analysis adds to the growing body of research that questions the superiority of governance indices in providing a reliable picture of corporate governance quality," Zeghal says. "If investors had to choose between a governance index and one governance dimension to predict a firm's performance based on the quality of its governance, our results show they may be better off analyzing the quality and effectiveness of the board of directors through an evaluation of its characteristics."
The research findings reinforce the notion that an efficient board of directors helps reduce firm's financing costs by limiting its exposure to market risk. This stems from better control of managerial opportunism, and improved transparency and reliability of financial statements.
The study examined the ability of two governance indices, the GM Index developed by the Globe & Mail and the Board Shareholder Confidence (BSC) Index developed by academics, and 11 individual board traits (such as size, representation, tenure, independence) to explain differences in firms' financing costs. The analysis is based on a sample of 192 Canadian firms listed on the
The study, "A Comparative Analysis of the Effect of Board Characteristics and Governance Indices on Companies' Cost of Financing: the Canadian Evidence" is authored by Raef Gouiaa, Universite du Quebec en Outaouais and Daniel Zeghal,
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