Scandinavian Working Papers in Business Administration

Financial Reporting Research Group Working Papers,
University of Aarhus, Aarhus School of Business, Department of Business Studies

No R-2005-04: Corporate governance ratings as a means to reduce asymmetric information

Morten Balling (), Claus Holm () and Thomas Poulsen ()
Additional contact information
Morten Balling: Department of Business Studies, Postal: The Aarhus School of Business, Fuglesangs Allé 4, 8210 Aarhus V, Denmark
Claus Holm: Department of Business Studies, Postal: The Aarhus School of Business, Fuglesangs Allé 4, 8210 Aarhus V, Denmark
Thomas Poulsen: Department of Business Studies, Postal: The Aarhus School of Business, Fuglesangs Allé 4, 8210 Aarhus V, Denmark

Abstract: Can corporate governance ratings reduce problems of asymmetric information between companies and investors? To answer this question, we set out to examine the information basis for providing such ratings by reviewing corporate governance attributes that are required or recommended in laws, accounting standards and codes, respectively. After that, we scrutinize and organize the publicly available information on the methodologies actually used by rating providers. However, important details of these methodologies are treated as confidential property, thus we approach the evaluation of corporate governance ratings as a means to reduce asymmetric information in a more general manner. We propose that the rating process may be seen as consisting of two general activities, namely a data reduction phase, and a data weighting, aggregation and classification phase. Findings based on a Danish data set suggest that rating providers by selecting relevant attributes in an intelligent way can improve the screening of companies according to governance quality. In contrast, it seems questionable that weighting, aggregation and classification of corporate governance attributes considerably improve discrimination according to governance quality

Keywords: No; keywords

43 pages, April 25, 2006

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