Our study creates a new firm governance index, which we use to form the basis of a new governance valuation factor. This latter metric is defined as the product of institutional quality in a country and the individual firm’s governance index. Using monthly returns of 4,714 blue chip firms from 35 OECD equity markets for 17 years, we show through tests of variants of the augmented-CAPM, that a two factor CAPM augmented with a factor mimicking portfolio based on our new governance metric yields the highest explanatory power. We argue that this is representative of the revealed preferences of insider controlling groups within firms towards appropriating minority outsiders.
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