Building a Corporate Governance Index from the Perspectives of Ownership and Leadership for Firms in Taiwan

This paper tests the relationship between ownership/leadership structures and stock returns for firms listed in Taiwan. A “Governance Index” is built based on four different aspects of the company’s governance structure: 1. CEO duality, 2. Size of the board of directors, 3. Managements’ holdings and 4. Block shareholders’ holding. This index is used as a proxy measure of the effectiveness of the corporate governance mechanism. We propose that firms under good governance should outperform those under poor governance. We find a striking relationship between our governance index and stock performance of firms. The results imply that our corporate governance index is successful in evaluating the effectiveness of the governance mechanism of firms in Taiwan.