As in the article Corporate governance and equity prices by Paul Gompers, Joy Ishii and Andrew

Metric. The rights of shareholders vary across the firm. In that they proved that firms which have
stronger rights of shareholders had outperformed with the firms which doesn’t value the rights of
shareholders. They built models to examine the relationship between the shareholders’ right and the
company performance and proposed 3 hypotheses, following with some evidence to support them.

The authors created a Governance Index to represent the extent of shareholder’s right. For each
presence of the provision in the company which can limit the right of shareholders, they simply added
one point in that case to build the index. If the value of G≥14, the companies will be included in
Dictatorship Portfolio, while Democracy Portfolios consists of the firms with the lowest value of G.
The dictatorship means the managers are more powerful and shareholders’ right is more limited. The
democracy is the opposite.

They selected the data of 24 provisions for about 1500 companies from the publications of the
Investor Responsibility Research Centre in 1990s, while screening out the companies which issued
dual-class common stock. Based on the two portfolios, they built a regression model with abnormal
return as dependent variable and four regressors. In the model, the intercept “alpha” explains the
excess return of the company. The regression results show that alpha of the Dictatorship Portfolio is
negative and significant, while the democracy portfolio earns a positive and significant return. Next,
they conducted another model to find the relationship between Tobin Q that represents the value of
the firm and G. The result indicates that the relationship between Q and G is significantly negative in
nine years from 1990 to 1999. Generally, both results show that the more democratic company
outperform the dictatorial company.
In I hypothesis, if shareholders find it troublesome or expensive to exchange managers, then managers
might be more willing and ready to do things from which they’ll get personal not gains.
Turning to II hypotheses, governance will not influence performance. However, there should be a
perception that governance provisions are actually made for protecting management.
In III hypothesis, institutional possession, or alternative firm characteristics can be related each with
Governance and with abnormal returns. Governance provisions can be totally safe, with no influence
either on social control power or on agency prices.

In sum, we are extending the ppt that governance will not have an effect on performance. However,
there should be a perception that governance provisions are actually made for protecting management.
The stronger the right the investors have, the better the company's performance will be. That's why the
large investor tend to be interested in measuring the balance of power between shareholders and
managers.