CORPORATE GOVERNANCE AND MARKET VALUATION: THE ROLE OF THE INTERNAL CONTROL SYSTEM

We investigate the relationship between the internal control system at the company level (one of the crucial elements of corporate governance - CG) and the market valuation of the company (MV/BV). We use of a unique dataset that identifies companies’ governance behavior form the level of information conveyed to market participants through public Corporate Governance reports. Our data include 12,240 firm observations from 136 Italian listed companies for the years 2012 and 2015. Instead of considering a single CG attribute, we quantify CG by looking at various internal control system related issues. We build one Corporate Governance index based on a set of 45 individual governance attributes that correspond to as many aspects of the self-regulatory code of listed companies. Our index is additive with equal weights assigned to each governance attribute and is a good proxy on the quality and eligibility of the internal control system, as defined in the selfregulatory code. Our results show a positive and significant association between the internal control system at company level and the company's assessment according to the market. Overall, non-financial information (such as the CG report issued by listed companies) is taken into consideration by investors as a further factor to appreciate the level of adequacy of their investment choice.