How Does Corporate Governance Affect Equity Volatility? Worldwide Evidence and Theory

Abstract

Abstract We investigate the causal impact of corporate governance on equity volatility in a quasi-natural experimental setting by exploiting the staggered passage of governance reforms in the past 25 years. Using a sample of 33,831 firms from 48 countries, we find that equity volatility drops by one-fifth following the passage of reforms that increase board independence. This effect is driven by an adjustment in fixed operating costs as managerial expropriation decreases, rather than by changes in firms’ investments, profitability, asset risk, or financing decisions. We rationalize these findings with a model in which minority shareholders are subject to sticky managerial expropriation. (JEL G12, G32, G34) Received October 14, 2021; editorial decision July 26, 2022 by Editor Robert Marquez. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.