and McConnell, 2003) and empirical research in CG (Gompers et al., 2003;Larcker et al.,
2005;Bebchuk et al., 2009).
In response to these expanding results, stakeholders in general have started to demand
governance ratings (Sherman, 2004;Wei-An, 2008, p. 12) to avoid undesirable outcomes
(Daines et al., 2010), a new trend that has introduced the issue of measuring the CG quality
(Aguilera and Desender, 2012) both by academics (La Porta et al., 1998;Tsipouri and
Xanthakis, 2004;Cheung et al., 2007) and commercial agencies (GMI Ratings, 2013;Risk
Metrics/Institutional Shareholder Services, 2014;Credit Lyonnais Securities Asia, 2010;
Standard and Poor’s, 2007).
In particular, there is an extensive empirical literature examining the relationship between
CG and a company’s performance either as dependent or independent variables,
respectively (Bauer et al., 2004;Black et al., 2006;Bhagat and Bolton, 2007;Bebchuk et al.,
2009;Cheung et al., 2010;Cheung et al., 2011), indicating that there is no clear evidence
regarding the governance ratings and their performance. To address these mixed results,
an increasing number of studies criticized the way of constructing CG indices and
highlighted the practical problems that needed to be understood and solved (Bhagat et al.,
2008;Bozec and Bozec, 2011;Aguilera and Desender, 2012).
Undoubtedly, the majority of the studies which construct CG indices (for example, Drobetz
et al., 2004;Black et al., 2006;Renders et al., 2010;Lazarides and Drimpetas, 2011)donot
take the criteria of validity and reliability into consideration, an approach that casts doubt
on previous efforts regarding measuring CG.
For this reason, this study shed some light on how to construct a transparent, reliable and
valid index, considering equally the academics and practitioners’ perspectives. In
particular, this is the ﬁrst study – as far as we know – that provides advance knowledge
regarding the design and implementation of CG index. This is quite interesting because it
contributes to the discussion on the forward research agenda of CG index construction.
The remaining of this paper is organized as follows. The next section reviews the literature.
Section 3 describes the theoretical background in CG index development, while the
application of the proposed model is presented in Section 4. Section 5 discusses the
contribution of this methodology, as opposed to another approach in measuring the CG
disclosure. Finally, the conclusions and research perspectives are exposed in Section 6.
2. Literature review
2.1 Literature review on measuring corporate governance
In the aftermath of Enron’s collapse, varieties of academic and commercial indices are
being constructed to measure the CG (Bozec and Bozec, 2011). This widespread CG
evaluation reﬂects the stakeholders’ desire to improve transparency, accountability,
responsibility and, of course, economic performance (Aguilera and Cuervo-Cazurra, 2009;
Ntim et al., 2012). Therefore, CG rating systems could be used as a powerful indicator of
the extent to which a company is currently adding, or has the potential to add in the future
shareholder value (Mallin, 2001, p. 257). Thus, the premise of CG indices could be
summarized as follows:
[. . .] Companies that focus on CG and transparency will, over time, generate superior returns
and economic performance and lower their cost of capital (Sherman, 2004,p.6).
This means that the basic underlying assumption of CG indices is that they adequately
capture the quality of CG. However, what is the meaning of capturing the quality of CG?
Does it mean that the construction captures the ﬁrm’s level governance quality or the
disclosure quality (Bhagat et al., 2008;Aguilera and Desender, 2012)? In literature review,
there is a variety of studies in emerging markets (Klapper and Love, 2004), as well as in
Europe (Drobetz et al., 2004;Tsipouri and Xanthakis, 2004;Florou and Galarniotis, 2007),
the USA (Brown and Caylor, 2006;Bhagat and Bolton, 2007;Bebchuk et al., 2009) and Asia
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