Do investors benefit from good corporate governance?

Purpose - The purpose of this paper is to examine the continuing search for evidence that good corporate governance leads to positive organizational outcomes, and it presents a unique perspective on this issue based on firm size. Design/methodology/approach - The study utilized a comprehensive measure of governance as well as a risk-adjusted measure of share price in its comparisons between companies known for good governance and broader markets composed of similar-sized firms. Findings - The findings show evidence of better risk-adjusted performance across all recent sub-periods (three-, five-, and ten-year) for the firms in the smallest market capitalization category. Better risk-adjusted returns were earned for only the ten-year period for the largest firms and the overall US market. Mid-cap stocks were not significant in any of the three periods studied. The fact that the small cap stocks showed significance for all three sub-periods indicates the relationship between good corporate governance practices and the financial success of a company is the strongest for smaller firms and is more likely to be experienced in longer time horizons for most firms, small and large. Research limitations/implications - Investigations of this seminal issue have produced mixed results because the operational definitions of governance often are too narrow, the timeframes for impact are too constricted, and the comparisons are too broad. In addition, the use of a novel approach for understanding why these findings may hold true provides scholars with new avenues for thinking about and modeling the governance-performance relationship. Practical implications - Good governance matters and requires managers and policy makers to find the appropriate context in order to have meaningful comparisons. Social implications - The paper supports the "doing well while doing good'' paradigm for both individual and institutional investors' investment choices by showing that selecting firms that practice good corporate governance can be a long-term value-maximizing strategy. Originality/value - A major nuance from other studies of the impact of a firm's corporate governance performance on its financial performance is the authors' use of four sub-categories of companies based on market capitalization/firm size. Findings ultimately show whether investors/owners reward corporate governance via stock purchases, and if so, how this relationship may have changed over the past decade according to various markets and risk-adjusted returns.