Gaming governance: cosmetic or real corporate governance changes?

Using a large sample of firms with corporate governance ratings over the period 2004–2010, we propose that a firm’s governance level depends on the balance between private benefits and the career value of top managers. We find an apparent improvement in the corporate governance quotient (CGQ) when there is a shock to managers’ career value. However, a significant proportion of firms that initially improve their CGQ subsequently reverse these governance changes; a later reduction in external pressure is positively associated with CGQ reversal. Finally, stock market investors are fooled by temporary governance improvements.