The Impact of Governance and Productivity on Stock Returns in European Industrial Companies

The target of our research is focused on the measurement of the impact of a Country Governance Index and of a Corporate Productivity Index on the total annual investment returns of stocks of a large sample of European Industrial Companies from January 1, 1996 to December 31, 2008. The authors take into account an innovative database of observations of corporations belonging to a large number of European euro and not euro countries. In order to achieve this target, the paper juxtaposes the Fama and French (1992, 1993) three factors model, with the studies of Doidge et al. (2007) and Gompers et al. (2003), analyzing governance and the index suggested by Parhizgari and Aburachis (2003) in order to measure the impact of corporate productivity on stock returns. Empirical evidence suggests that the Country Governance Index is negatively correlated with the total annual investment return of stocks of the listed industrial companies of our sample, meanwhile the more productive firms are characterized by higher stock returns.