• The Impact of Corporate Governance on the Relations among Fundamental Financial Information and Stock Returns: An Endogenous Switching Model Approach

Abstract

This paper investigates whether corporate governance affects the relations among fundamental financial information and stock returns using Taiwan data. We employ the endogenous switching model (ESM) of Hu and Schiantarelli (1998) and divide the sample into strong and weak governance regimes. Employing the linear model, we find that the coefficients of Inventory, Gross Margin, Provision for Doubtful Receivables and Change in Leverage Ratio show the expected negative signs, whereas Research and Development Expenditures, Sales and Administrative Expenses and Labor Force show counter-intuitive results as the coefficients are positive. Annual change in Earnings Per Share (EPS), Accounts Receivable, Effective Tax Rate and Audit Qualification do not have any significant impact on stock returns. Employing our ESM model, the previous counter-intuitive coefficients become consistent with our expectations.

Keywords: Corporate governance, Fundamental financial information, Endogenous switching model