Measuring Corporate Governance Using Antitakeover Provisions: A Dynamically Weighted Approach

Abstract

This paper presents the "nG (new Governance) Index", an unequal-weighted measure of corporate governance that dynamically captures the heterogeneity of its individual antitakeover components, as an alternative to the equal-weighted indices proposed in the related literature. Our findings show that all antitakeover provisions do not equally contribute to the firms' corporate governance quality, and our proposed nG-Index therefore traces the governance--performance relationship more persistently than an equal-weighted measure does. Further analysis reveals that an nG-Index based zero-investment hedge, going long on a poor governance portfolio and shorting the good governance one, would generate an abnormal return of over 1.28% per month, or about 15% per year. In contrast, a comparable hedge using equal-weighted index shows no significant abnormal returns.