The purpose of this study is to investigate the impact of adding G-index stocks to the benchmark assets composed of ADRs from the perspective of asset allocations for the period from 1990-2005. We apply the mean-variance spanning test and the intersection test to analyze whether the well-governed firm stocks can provide significant diversification benefits.
Our results do not entirely reveal the positive answers. As our previous results revealed, almost all of the test statistics indicate that investors who invest in the various G-index stocks are able to expand their mean-variance frontiers relative to investments in benchmark portfolios composed of 12ADRs or 13ADRs. Besides, according to the insignificant results of WI andW1, investors who add all G-index stock portfolios or the well-governed/
badly-governed firm stocks will provide diversification benefits only by reducing risk but cannot improve their investment opportunity set. However, our evidence indicates that the stocks of badly-governed firms will improve the investment opportunity set more than the stocks of well-governed firms which is absolutely in contrast to our prior expectations. This finding might imply that the corporate governance index may not be a useful measurement to distinguish the diversification benefits when investing in the full sample period from 1990-2005. In other words, corporate governance has no direct relation with the degree of mean- variance frontier’s improvement in this sample period.
For explanation, we consider the problem of “time-period-specificity” proposed by Core, Guay, and Rusticus (2006), dividing our full-sample period into two sub-sample periods (1990-1999, 2000-2005). Our result of sub-sample periods reveal that following the original GIM sample period 1990-1999, the stocks of strong governance firms can significantly improve the investment opportunity set more than the stocks of weak
29
governance firms. However, the significant difference in diversification benefits between well-governed and badly-governed firms diminishes immediately during 2000-2005. Thus, our consideration of the influence of the “Internet bubble” around April 2000, which is the
“time-period-specificity” suggested by Core, Guay, and Rusticus (2006), helps to provide evidence to confirm our conclusion. Overall, the reason that the well-governed firm stocks are unable to contribute more diversification benefits than the poorly-governed firm stocks in the entire sample period from 1990-2005 show significant differences in diversification benefits during 1990-1999, and could be due to the time-period-specificity nature for structure change.
30
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Figure 1
Cumulative Raw Returns : Democracies and Dictatorships from 1990 to 2005
This figure is replicated from the Figure 1 in Core, Guay, and Rusticus(2006) and shows the development of the value of Democracy(G<=5), Dictatorship(G>=14), and hedge portfolios from 1990 to 2005. The upper line plots value of the Democracy portfolio over time, assuming $1 is invested in the portfolios in September 1990. The middle line plots the value of the Dictatorship portfolio and the bottom line plots the value of the hedge portfolio.
‐1 0 1 2 3 4 5 6 7 8 9
199009 199105 199201 199209 199305 199401 199409 199505 199601 199609 199705 199801 199809 199905 200001 200009 200105 200201 200209 200305 200401 200409 200505
G<=5 G>=14 Hedge
33
Figure 2
Mean- Variance Frontiers of 12ADRs and Augmented Assets
This figure plots the mean-variance frontier of equally-weighted/value-weighted 12 countires’
ADRs benchmark portfolios (the inner solid frontier) and the mean-variance frontier of augmented assets (benchmark portfolios plus all G-index stocks, G<=5 stocks and G>=14 stocks, the outer dashed frontier). The sample period is from September 1990 to December 2005. The expected returns and the standard deviations in the figure are presented monthly.
Panel A: Frontiers of the G-index portfolios and equally-weighted 12ADRs benchmark portfolios
All G-index Company with Equally-Weighted 12ADRs
Expected Return
Standard Deviation
Benchmark Portfolios
G-index plus Benchmark Portfolios
0.02 0.04 0.06 0.08 0.1 0.12 0.14 0.16 0.18 0.2
G<=5 Company with Equally-Weighted 12ADRs
Expected Return
Standard Deviation
Benchmark Portfolios
G-index plus Benchmark Portfolios
34
0.02 0.04 0.06 0.08 0.1 0.12 0.14 0.16 0.18 0.2 -0.01
0 0.01 0.02 0.03 0.04 0.05
G>=14 Company with Equally-Weighted 12ADRs
Expected Return
Standard Deviation
Benchmark Portfolios
G-index plus Benchmark Portfolios
Panel B: Frontiers of the G-index portfolios and value-weighted 12ADRs benchmark portfolios
0.02 0.04 0.06 0.08 0.1 0.12 0.14 0.16 0.18 0.2
-0.01 0 0.01 0.02 0.03 0.04 0.05
All G-index Company with Value-Weighted 12ADRs
Expected Return
Standard Deviation
Benchmark Portfolios
G-index plus Benchmark Portfolios
35
0.02 0.04 0.06 0.08 0.1 0.12 0.14 0.16 0.18 0.2 -0.01
0 0.01 0.02 0.03 0.04 0.05
G<=5 Company with Value-Weighted 12ADRs
Expected Return
Standard Deviation
Benchmark Portfolios
G-index plus Benchmark Portfolios
0.02 0.04 0.06 0.08 0.1 0.12 0.14 0.16 0.18 0.2
-0.01 0 0.01 0.02 0.03 0.04 0.05
G>=14 Company with Value-Weighted 12ADRs
Expected Return
Standard Deviation
Benchmark Portfolios
G-index plus Benchmark Portfolios
36
Figure 3
Mean- Variance Frontiers of 13ADRs and Augmented Assets
This figure plots the mean-variance frontier of equally-weighted/value-weighted 13 countires’
ADRs benchmark portfolios (the previous 12 countries’ ADRs plus ADRs of China, the inner solid frontier) and the mean-variance frontier of augmented assets (benchmark portfolios plus all G-index stocks, G<=5 stocks and G>=14 stocks, the outer dashed frontier). The sample period is from August 1993 to December 2005. The expected returns and the standard deviations in the figure are presented monthly.
Panel A: Frontiers of the G-index portfolios and equally-weighted 13ADRs benchmark portfolios
All G-index Company with Equally-Weighted 12ADRs and China ADR
Expected Return
Standard Deviation
Benchmark Portfolios
G-index plus Benchmark Portfolios
0.02 0.04 0.06 0.08 0.1 0.12 0.14 0.16 0.18 0.2
G<=5 Company with Equally-Weighted 12ADRs and China ADR
Expected Return
Standard Deviation
Benchmark Portfolios
G-index plus Benchmark Portfolios
37
0.02 0.04 0.06 0.08 0.1 0.12 0.14 0.16 0.18 0.2 -0.01
0 0.01 0.02 0.03 0.04 0.05
G>=14 Company with Equally-Weighted 12ADRs and China ADR
Expected Return
Standard Deviation
Benchmark Portfolios
G-index plus Benchmark Portfolios
Panel B: Frontiers of the G-index portfolios and value-weighted 13ADRs benchmark portfolios
0.02 0.04 0.06 0.08 0.1 0.12 0.14 0.16 0.18 0.2
-0.01 0 0.01 0.02 0.03 0.04 0.05
All G-index Company with Value-Weighted 12ADRs and China ADR
Expected Return
Standard Deviation
Benchmark Portfolios
G-index plus Benchmark Portfolios
38
0.02 0.04 0.06 0.08 0.1 0.12 0.14 0.16 0.18 0.2 -0.01
0 0.01 0.02 0.03 0.04 0.05
G<=5 Company with Value-Weighted 12ADRs and China ADR
Expected Return
Standard Deviation
Benchmark Portfolios
G-index plus Benchmark Portfolios
0.02 0.04 0.06 0.08 0.1 0.12 0.14 0.16 0.18 0.2
-0.01 0 0.01 0.02 0.03 0.04 0.05
G>=14 Company with Value-Weighted 12ADRs and China ADR
Expected Return
Standard Deviation
Benchmark Portfolios
G-index plus Benchmark Portfolios
39
Figure 4
Mean- Variance Frontiers of Sub-Sample Periods
This figure plots the mean-variance frontier of equally-weighted/value-weighted 12 countires’
ADRs benchmark portfolios (the inner solid frontier) and the mean-variance frontier of augmented assets (benchmark portfolios plus G<=5 stocks and G>=14stocks, the outer dashed frontier) is the same as before. There is something different here in which we divide our full-sample period into two sub-sample periods (1990-1999, 2000-2005). The figure displays the mean-variance frontiers before and after December 1999. The expected returns and the standard deviations in the figure are presented monthly.
Panel A: Frontiers of the G-index portfolios and equally-weighted benchmark portfolios before 1999/12
G<=5 Company with Equally-Weighted 12ADRs before 99/12
Expected Return
Standard Deviation
Benchmark Portfolios
G-index plus Benchmark Portfolios
0.02 0.04 0.06 0.08 0.1 0.12 0.14 0.16 0.18 0.2
G>=14 Company with Equally-Weighted 12ADRs before 99/12
Expected Return
Standard Deviation
Benchmark Portfolios
G-index plus Benchmark Portfolios
40
Panel B: Frontiers of the G-index portfolios and value-weighted benchmark portfolios before 1999/12
0.02 0.04 0.06 0.08 0.1 0.12 0.14 0.16 0.18 0.2 -0.01
0 0.01 0.02 0.03 0.04 0.05
G<=5 Company with Value-Weighted 12ADRs before 99/12
Expected Return
Standard Deviation
Benchmark Portfolios
G-index plus Benchmark Potfolios
0.02 0.04 0.06 0.08 0.1 0.12 0.14 0.16 0.18 0.2 -0.01
0 0.01 0.02 0.03 0.04 0.05
G>=14 Company with Value-Weighted 12ADRs before 99/12
Expected Return
Standard Deviation
Benchmark Portfolios
G-index plus Benchmark Portfolios
41
Panel C: Frontiers of the G-index portfolios and equally-weighted benchmark portfolios after 1999/12
0.02 0.04 0.06 0.08 0.1 0.12 0.14 0.16 0.18 0.2
-0.01 0 0.01 0.02 0.03 0.04 0.05
G<=5 Company with Equally-Weighted 12ADRs after 99/12
Expected Return
Standard Deviation
Benchmark Portfolios
G-index plus Benchmark Portfolios
0.02 0.04 0.06 0.08 0.1 0.12 0.14 0.16 0.18 0.2
-0.01 0 0.01 0.02 0.03 0.04 0.05
G>=14 Company with Equally-Weighted 12ADRs after 99/12
Expected Return
Standard Deviation
Benchmark Portfolios
G-index plus Benchmark Portfolios
42
Panel D: Frontiers of the G-index portfolios and value-weighted benchmark portfolios after 1999/12
0.02 0.04 0.06 0.08 0.1 0.12 0.14 0.16 0.18 0.2
-0.01 0 0.01 0.02 0.03 0.04 0.05
G<=5 Company with Value-Weighted 12ADRs after 99/12
Expected Return
Standard Deviation
Benchmark Portfolios
G-index plus Benchmark Portfolios
0.02 0.04 0.06 0.08 0.1 0.12 0.14 0.16 0.18 0.2
-0.01 0 0.01 0.02 0.03 0.04 0.05
G>=14 Company with Value-Weighted 12ADRs after 99/12
Expected Return
Standard Deviation
Benchmark Portfolios
G-index plus Benchmark Potfolios
43
Table 1
ADR Countries, Numbers, and Effective Dates
This table presents the ADR Countries, ADR numbers and their effective dates. Panel A presents countries which issue ADRs and the number of ADRs they issued. Panel B provides the earliest effective date of each country. We take a total of 126 ADRs of 12 countries in Panel B which have effective dates since 1990/09 as the 12ADRs benchmark assets and a total of 151 ADRs of the previous 12 countries plus China which have effective dates since 1993/08 as the 13ADRs benchmark assets. The boldfaces represent the countries included in our benchmarks.
Panel A: Countries and ADR Numbers Country ADR Numbers Country ADR Numbers
Argentina 7 Korea
Australia 11 Luxembourg
Belgium 1 México
Brazil 8 Netherlands
Chile 11 New Zealand
China 26 Norway
Hong Kong 13 South Africa
Hungary 1 Spain
India 10 Sweden
Indonesia 2 Switzerland
Ireland 7 Taiwan
Israel 6 Turkey
Italy 7 United Kingdom
Japan 22 Venezuela
Jersey 1 Total
Panel B: Countries and the Effective date Country Effective Date Country Effective Date Argentina 1993 Singapore
Australia 1990 Taiwan
Brazil 1997 United Kingdom
Chile 1990 South Africa
China 1993 Indonesia
France 1991 Italy
Germany 1993 Denmark
Hong Kong 1996 Russia
India 1999 Spain
Japan 1990 Irland
Korea 1994 Netherland
México 1990 Norway
Table 2
Monthly Abnormal Returns from September 1990 to December 2005 We estimated the four-factor regressions with value-weighted monthly returns of stock portfolios sorted by the G-index. We use the trading strategy following Gompers et al.
(2003) that took a long position of the Democracy portfolio (G≦5) and a short position of the Dictatorship portfolio (G≧14). The intercept measures the abnormal returns of the strategy after controlling the four factors. The first regression is our replication of the GIM result. The second regression is the result from the period of January 2000 to December 2005. The third regression is the result of our full sample period (September 1990-December 2005). The portfolio is reset in September 1990, July 1993, July 1995, February 1998, January 2000, January 2002, and January 2004, which are the months after the new data on G-index became available.
Monthly abnormal returns (Democracy-Dictatorship)
Intercept RMRF SMB HML Momentum
Original Results by GIM, Table VI
GIM coefficient 0.71** -0.04 -0.22* -0.55** -0.01
Our replication of GIM Results over the Original Sample Period(1990/9-1999/12)
Coefficient 0.69* -0.08 -0.38** -0.68** -0.09
Standard error 0.33 0.09 0.11 0.13 0.07
t-statistic 2.08 -0.91 -3.43 -4.95 -1.16
Analysis of Period following the Original Sample Period (2000/01-2005/12)
Coefficient -0.07 0.2* 0.07 -0.46** 0.02
Standard error 0.44 0.10 0.11 0.13 0.04
t-statistic -0.17 2.12 0.67 -3.42 0.39
Analysis of the Combined Sample Period (1990/9-2005/12)
Coefficient 0.42 0.05 -0.14 -0.62 -0.02
Standard error 0.26 0.07 0.08 0.10 0.04
t-statistic 1.58 0.74 -1.87 -6.52 -0.52
*Significant at 0.05 level;**significant at the 0.01level
45
Table 3 Summary Statistics
This table provides the descriptive statistics of our variables. Panel A presents the G-index firms and returns consists of 9150 observations from 1990 to 2005 covered by the IRRC antitakeover provision database, excluding financial firms and utilities (sic 6000-6999 and 4900-4999). Panel B and Panel C are summary statistics of equally-weighted/value-weighted cases for 12ADRs and 13ADRs.
Panel A: Descriptive Statistics of G-index and Rerurn (1990-2005)
Variable Obs. Mean Std Dev. Minimum Maximum
G-index 9150 9.0148 2.7087 1 18
Return (All) 9150 0.0038 0.0415 -0.7648 0.6201
Return (G<=5) 911 0.0114 0.0328 -0.6102 0.5914
Return (G>=14) 468 0.0018 0.0442 -0.0484 0.3000
Panel B: Descriptive Statistics of 12ADRs (1990-2005) Equally-Weighted
Country Obs. Mean Median Std Dev. Minimum Maximum
Australia 184 0.0114 0.0107 0.1123 -0.2271 0.4154
Chile 184 0.0195 0.0136 0.0888 -0.3796 0.3305
Japan 184 0.0082 0.0058 0.0653 -0.1648 0.1773
México 184 0.0192 0.0178 0.1121 -0.3502 0.5225
United Kingdom 184 0.0155 0.0133 0.0542 -0.1604 0.1620
South Africa 184 0.0169 0.0186 0.1080 -0.2568 0.5203
Italy 184 0.0144 0.0140 0.0699 -0.2109 0.2776
Denmark 184 0.0230 0.0186 0.0752 -0.2626 0.2524
Spain 184 0.0138 0.0101 0.0671 -0.2158 0.2269
Irland 184 0.0226 0.0224 0.1234 -0.2633 0.4648
Netherland 184 0.0213 0.0139 0.1119 -0.2663 0.5273
Norway 184 0.0111 0.0165 0.0736 -0.2232 0.2366
Total 2208 0.0164 0.0140 0.0912 -0.3796 0.5273
Value-Weighted
Country Obs. Mean Median Std Dev. Minimum Maximum
Australia 184 0.0137 0.0034 0.1090 -0.2264 0.4294
Chile 184 0.0164 0.0158 0.0889 -0.3437 0.3305
Japan 184 0.0068 0.0087 0.0769 -0.1614 0.3781
México 184 0.0232 0.0238 0.1049 -0.2923 0.5225
United Kingdom 184 0.0110 0.0121 0.0458 -0.1197 0.1459
South Africa 184 0.0089 0.0026 0.1190 -0.2656 0.6461
Italy 184 0.0218 0.0179 0.1207 -0.3240 0.4223
Denmark 184 0.0172 0.0148 0.0706 -0.2763 0.2702
Spain 184 0.0135 0.0093 0.0718 -0.2284 0.2413
Irland 184 0.0172 0.0235 0.1226 -0.5074 0.3571
Netherland 184 0.0210 -0.0021 0.1561 -0.3492 0.6586
Norway 184 0.0113 0.0132 0.0759 -0.2232 0.2366
Total 2208 0.0152 0.0136 0.1010 -0.5074 0.6586
46
Panel C: Descriptive Statistics of 13ADRs (1993-2005) Equally-Weighted
Country Obs. Mean Median Std Dev. Minimum Maximum
Australia 149 0.0101 0.0127 0.1109 -0.2271 0.4154
Chile 149 0.0109 0.0048 0.0838 -0.3796 0.2353
Japan 149 0.0086 0.0073 0.0619 -0.1648 0.1708
México 149 0.0136 0.0181 0.1078 -0.3502 0.2942
United Kingdom 149 0.0168 0.0136 0.0539 -0.1604 0.1620
South Africa 149 0.0180 0.0201 0.1122 -0.2568 0.5203
Italy 149 0.0134 0.0134 0.0649 -0.2109 0.1953
Denmark 149 0.0249 0.0208 0.0802 -0.2626 0.2524
Spain 149 0.0152 0.0107 0.0682 -0.2158 0.2269
Irland 149 0.0204 0.0147 0.1227 -0.2633 0.4648
Netherland 149 0.0268 0.0154 0.1097 -0.2663 0.5273
Norway 149 0.0149 0.0171 0.0720 -0.2232 0.2366
China 149 0.0197 0.0115 0.1399 -0.3588 0.6699
Total 1937 0.0164 0.0142 0.0949 -0.3796 0.6699
Value-Weighted
Country Obs. Mean Median Std Dev. Minimum Maximum
Australia 149 0.0151 0.0070 0.1147 -0.2264 0.4294
Chile 149 0.0074 0.0106 0.0841 -0.3437 0.2135
Japan 149 0.0075 0.0129 0.0762 -0.1614 0.3781
México 149 0.0176 0.0252 0.0969 -0.2923 0.2350
United Kingdom 149 0.0123 0.0125 0.0436 -0.1197 0.1459
South Africa 149 0.0081 0.0037 0.1210 -0.2656 0.6461
Italy 149 0.0228 0.0156 0.1270 -0.3240 0.4223
Denmark 149 0.0176 0.0185 0.0749 -0.2763 0.2702
Spain 149 0.0145 0.0094 0.0735 -0.2284 0.2413
Irland 149 0.0137 0.0199 0.1213 -0.5074 0.3571
Netherland 149 0.0291 0.0143 0.1547 -0.3492 0.6586
Norway 149 0.0151 0.0184 0.0748 -0.2232 0.2366
China 149 0.0164 0.0027 0.1360 -0.3446 0.6722
Total 1937 0.0152 0.0136 0.1043 -0.5074 0.6722
47
Table 4 Correlation Matrix
The table provides the correlations among different corporate governance portfolios and ADR benchmark assets. Panel A and Panel B provide the correlations between corporate governance portfolios and equally-weighted/value-weighted 12ADRs benchmark assets from 1990-2005. Panel C and Panel D provide the correlations between corporate governance portfolios and equally-weighted/value-weighted 13ADRs benchmark assets from 1993-2005. We take G<=5 as the better corporate governance portfolio (Democracy portfolio) and G>=14 as the worse corporate governance portfolio (Dictatorship portfolio).
Panel A :Correlations of G-index and Equally-Weighted 12ADRs
All G<=5 G>=14 Australia Chile Japen Mexico U.K. South Africa Italy Denmark Spain Irland Netherland Norway All 1.0000
G<=5 0.9053 1.0000
G>=14 0.7683 0.6719 1.0000
Australia 0.2790 0.2065 0.2422 1.0000
Chile 0.4679 0.3744 0.3939 0.3546 1.0000
Japen 0.4470 0.3821 0.2972 0.3622 0.2515 1.0000
Mexico 0.4805 0.4237 0.3851 0.1953 0.4779 0.3412 1.0000
U.K. 0.6436 0.5967 0.5036 0.3406 0.4364 0.4636 0.4849 1.0000
South Africa 0.0820 0.0349 0.0979 0.3027 0.2146 0.1944 0.1548 0.1598 1.0000
Italy 0.5257 0.4592 0.4261 0.3643 0.3791 0.4950 0.3533 0.5249 0.1179 1.0000
Denmark 0.2305 0.1657 0.1989 0.1016 0.1398 0.1135 0.0735 0.2654 -0.0123 0.2574 1.0000
Spain 0.5640 0.4932 0.4212 0.2101 0.4220 0.4203 0.3746 0.5796 0.0609 0.5255 0.3137 1.0000
Irland 0.5631 0.5335 0.4107 0.2710 0.3167 0.2764 0.3539 0.4649 0.0508 0.3188 0.2317 0.4269 1.0000
Netherland 0.5632 0.5191 0.4051 0.2862 0.3554 0.3348 0.3314 0.5416 0.1032 0.4703 0.1692 0.4655 0.3947 1.0000
Norway 0.4744 0.4088 0.4342 0.3086 0.3625 0.3576 0.3198 0.5151 0.3022 0.3948 0.1911 0.4578 0.2469 0.3629 1.0000
48
Panel B :Correlations of G-index and Value-Weighted 12ADRs
All G<=5 G>=14 Australia Chile Japen Mexico U.K. South Africa Italy Denmark Spain Irland Netherland Norway All 1.0000
G<=5 0.9053 1.0000
G>=14 0.7683 0.6719 1.0000
Australia 0.2402 0.1494 0.2398 1.0000
Chile 0.4922 0.3975 0.4356 0.2952 1.0000
Japen 0.4869 0.4495 0.2749 0.3087 0.2673 1.0000
Mexico 0.5338 0.4635 0.3664 0.1334 0.4780 0.3632 1.0000
U.K. 0.6433 0.5045 0.5303 0.3017 0.3502 0.3509 0.3536 1.0000
South Africa 0.0845 0.0545 0.1150 0.3079 0.1614 0.1823 0.1282 0.1878 1.0000
Italy 0.5862 0.5582 0.3396 0.2374 0.2772 0.4918 0.2942 0.4456 0.0271 1.0000
Denmark 0.2140 0.1665 0.1815 0.0026 0.0917 0.0776 0.0083 0.2211 -0.0164 0.1557 1.0000
Spain 0.5646 0.5005 0.3882 0.1188 0.3903 0.4471 0.3986 0.5062 0.0175 0.4831 0.2161 1.0000
Irland 0.4245 0.3769 0.3067 0.1158 0.2269 0.2235 0.3418 0.2568 -0.0091 0.1788 0.1717 0.3229 1.0000
Netherland 0.5488 0.5237 0.3619 0.2244 0.3150 0.3360 0.2824 0.3626 0.0320 0.5643 0.0788 0.4105 0.2082 1.0000
Norway 0.4388 0.3732 0.4226 0.3504 0.3828 0.3364 0.3127 0.5232 0.2774 0.2800 0.1338 0.3877 0.1705 0.3316 1.0000
49
Panel C :Correlations of G-index and Equally-Weighted 13ADRs
All G<=5 G>=14 Australia Chile Japen Mexico U.K. South Africa Italy Denmark Spain Irland Netherland Norway China All 1.0000
G<=5 0.9095 1.0000
G>=14 0.7504 0.6579 1.0000
Australia 0.3840 0.3039 0.3918 1.0000
Chile 0.5438 0.4337 0.4596 0.3917 1.0000
Japen 0.5364 0.4834 0.3845 0.4056 0.3806 1.0000
Mexico 0.5200 0.4895 0.4148 0.2699 0.5202 0.4380 1.0000
U.K. 0.6857 0.6385 0.5533 0.4306 0.5284 0.4359 0.5184 1.0000
South Africa 0.1204 0.0522 0.1562 0.3297 0.2859 0.2419 0.2256 0.1998 1.0000
Italy 0.6817 0.6114 0.6230 0.4529 0.5071 0.4937 0.4779 0.6397 0.1227 1.0000
Denmark 0.2388 0.1638 0.2379 0.1431 0.1705 0.1017 0.1174 0.2906 -0.0215 0.2518 1.0000
Spain 0.5999 0.5173 0.4574 0.2743 0.5283 0.3956 0.4338 0.5841 0.0503 0.5985 0.2967 1.0000
Irland 0.5457 0.5249 0.3391 0.3352 0.3490 0.3686 0.3725 0.5299 0.0532 0.4155 0.2619 0.4474 1.0000
Netherland 0.6092 0.5473 0.4578 0.2751 0.4315 0.4145 0.4231 0.5908 0.0879 0.6049 0.1882 0.4924 0.4270 1.0000
Norway 0.4995 0.4144 0.4748 0.4128 0.5137 0.3827 0.4454 0.5292 0.3273 0.4828 0.2145 0.5207 0.2441 0.4245 1.0000
China 0.3451 0.2662 0.4557 0.3029 0.5013 0.2158 0.2866 0.3136 0.4507 0.3230 0.0528 0.2845 0.1541 0.2858 0.3510 1.0000
50
Panel D :Correlations of G-index and Value-Weighted 13ADRs
All G<=5 G>=14 Australia Chile Japen Mexico U.K. South Africa Italy Denmark Spain Irland Netherland Norway China All 1.0000
G<=5 0.9095 1.0000
G>=14 0.7504 0.6579 1.0000
Australia 0.2791 0.1841 0.3137 1.0000
Chile 0.5707 0.4562 0.5124 0.3280 1.0000
Japen 0.5679 0.5386 0.3409 0.3068 0.3913 1.0000
Mexico 0.5934 0.5497 0.3875 0.1706 0.5178 0.4940 1.0000
U.K. 0.6439 0.5098 0.5347 0.3532 0.4959 0.3852 0.4053 1.0000
South Africa 0.1229 0.0633 0.1616 0.3162 0.2489 0.2039 0.2443 0.2265 1.0000
Italy 0.6686 0.6384 0.4353 0.2550 0.3447 0.5076 0.3864 0.5225 0.0058 1.0000
Denmark 0.2189 0.1648 0.2147 0.0224 0.1047 0.0632 0.0462 0.1963 -0.0276 0.1311 1.0000
Spain 0.5914 0.5193 0.4092 0.1431 0.4973 0.4629 0.4834 0.4950 -0.0094 0.5219 0.1784 1.0000
Irland 0.3829 0.3483 0.2056 0.1260 0.2159 0.2737 0.3467 0.1721 0.0144 0.1948 0.1940 0.3195 1.0000
Netherland 0.6002 0.5634 0.4122 0.1810 0.3917 0.4252 0.3851 0.4119 -0.0019 0.6525 0.0932 0.4731 0.2156 1.0000
Norway 0.4547 0.3708 0.4587 0.3955 0.5396 0.3459 0.4466 0.5462 0.3001 0.3055 0.1505 0.4250 0.1527 0.3820 1.0000
China 0.3303 0.2381 0.4324 0.3203 0.4887 0.1279 0.2695 0.3509 0.4206 0.1616 0.0107 0.2245 0.0575 0.2275 0.3505 1.0000
51
Table 5
Mean-Variance Spanning, Intersection and Step-Down Tests using the 12ADRs Portfolios as Benchmarks
The table shows the mean-variance spanning, intersection, and step-down tests when adding various G-index portfolios to the 12ADRs benchmark assets. We exclude financial firms and utilities (sic 6000-6999 and 4900-4999). The sample covered by the IRRC antitakeover provision database. F, LM, and LR present the Finite sample, the Lagrange multiplier, and the Likelihood ratio tests. The W represents the asymptotic Wald test for spanning. W1 and W2 are the step-down Wald tests for spanning. WI represents the asymptotic Wald test for intersection, and the mean monthly risk-free rate, 0.33%, is used for intersection test. *and **
denote the significance level at 5% and 1% respectively.
12ADRs as Benchmark
Panel A Equally-Weighted
Step-Down Tests
F LM LR W WI W1 W2
All G-index Firms
Test Statistics 47.0269 65.2920 80.6415 101.2041 0.0472 0.2243 100.8568 P Value (0.0000)** (0.0000)** (0.0000)** (0.0000)** (0.8280) (0.6358) (0.0000)**
Democracy Portfolio(G<=5)
Test Statistics 24.3599 40.7994 46.1269 0.2251 0.0005 0.2251 52.1348
P Value (0.0000)** (0.0000)** (0.0000)** (0.0000)** (0.9820) (0.6352) (0.0000)**
Dictatorship Portfolio(G>=14)
Test Statistics 40.9048 59.5427 71.9391 88.0291 0.0069 0.3150 87.5642
P Value (0.0000)** (0.0000)** (0.0000)** (0.0000)** (0.9340) (0.5746) (0.0000)**
Panel B Value-Weighted
Step-Down Tests
F LM LR W WI W1 W2
All G-index Firms
Test Statistics 27.8093 45.1588 51.8153 59.8470 0.2017 0.0237 59.8156
P Value (0.0000)** (0.0000)** (0.0000)** (0.0000)** (0.6533) (0.8777) (0.0000)**
Democracy Portfolio(G<=5)
Test Statistics 16.2965 29.4564 32.1005 35.0708 0.0074 0.1408 34.9033
P Value (0.0000)** (0.0000)** (0.0000)** (0.0000)** (0.9312) (0.7075) (0.0000)**
Dictatorship Portfolio(G>=14)
Test Statistics 21.7162 37.2684 41.6448 46.7342 0.0075 0.1989 46.4851
P Value (0.0000)** (0.0000)** (0.0000)** (0.0000)** (0.9308) (0.6556) (0.0000)**
52
Table 6
Sharpe Ratios and Properties of Tangency and Global Minimum-Variance Portfolios Before and After Adding the G-Index Portfolios
The table reports the mean returns and standard deviations of the tangency and global minimum-variance (GMV) portfolios before and after adding the G-index portfolios. This table also reports percentage changes in the Sharpe ratio and the reductions in the standard deviation of the GMV portfolio. The test assets are constructed by stocks of the G-index firms trading on the NYSE, the AMEX, and the NASDAQ. The sample period is from 1990 to 2005, which takes the 12ADRs as benchmark assets.
12ADRs as Benchmark
Equally-Weighted Value-Weighted
All G-index Firms before after before after before after before after
Tangency Portfolio
Mean Return 0.0226 0.0236 0.0212 0.0233
Standard Deviation 0.0554 0.0580 0.0585 0.0649
Sharpe Ratio 0.3493 0.3497 0.3057 0.3077
% change in Sharp Ratio GMV Portfolio
Mean Return 0.0150 0.0107 0.0113 0.0089
Standard Deviation 0.0431 0.0351 0.0391 0.0342
% change in Standard Deviation
Democracy Portfolio(G<=5) before after before after before after before after Tangency Portfolio
Mean Return 0.0226 0.0227 0.0212 0.0214
Standard Deviation 0.0554 0.0556 0.0585 0.0593
Sharpe Ratio 0.3493 0.3493 0.3057 0.3058
% change in Sharp Ratio GMV Portfolio
Mean Return 0.0150 0.0125 0.0113 0.0100
Standard Deviation 0.0431 0.0383 0.0391 0.0359
% change in Standard Deviation
Dictatorship Portfolio(G>=14) before after before after before after before after Tangency Portfolio
Mean Return 0.0226 0.0230 0.0212 0.0215
Standard Deviation 0.0554 0.0563 0.0585 0.0594
Sharpe Ratio 0.3493 0.3494 0.3057 0.3058
% change in Sharp Ratio GMV Portfolio
Mean Return 0.0150 0.0113 0.0113 0.0096
Standard Deviation 0.0431 0.0358 0.0391 0.0351
% change in Standard Deviation
-12.5320
Table 7
Mean-Variance Spanning, Intersection and Step-Down Tests using the 13ADRs Portfolios as Benchmarks
The table shows the mean-variance spanning, intersection, and step-down tests when adding various G-index portfolios to the 13ADRs benchmark assets. We exclude financial firms and utilities (sic 6000-6999 and 4900-4999). The sample covered by the IRRC antitakeover provision database. F, LM, and LR present the Finite sample, the Lagrange multiplier, and the Likelihood ratio tests. The W represents the asymptotic Wald test for spanning. W1 and W2 are the step-down Wald tests for spanning. WI represents the asymptotic Wald test for intersection, and the mean monthly risk-free rate, 0.33%, is used for intersection test. *and ** denote the significance level at 5% and 1% respectively.
13ADRs as Benchmark
Panel A Equally-Weighted
Step-Down Tests
F LM LR W WI W1 W2
All G-index Firms
Test Statistics 26.3192 41.7991 49.0570 58.0972 0.2795 0.0001 58.0971
P Value (0.0000)** (0.0000)** (0.0000)** (0.0000)** (0.5971) (0.9932) (0.0000)**
Democracy Portfolio(G<=5)
Test Statistics 10.6021 20.2263 21.7376 23.4033 0.0000 0.1140 23.2715
P Value (0.0001)** (0.0000)** (0.0000)** (0.0000)** (0.9974) (0.7357) (0.0000)**
Dictatorship Portfolio(G>=14)
Test Statistics 37.0090 52.7642 65.1346 81.6939 0.2335 0.0237 81.6572
P Value (0.0000)** (0.0000)** (0.0000)** (0.0000)** (0.6290) (0.8776) (0.0000)**
Panel B Value-Weighted
Step-Down Tests
F LM LR W WI W1 W2
All G-index Firms
Test Statistics 21.0136 35.3734 40.3833 46.3856 0.3971 0.0068 46.3767
P Value (0.0000)** (0.0000)** (0.0000)** (0.0000)** (0.5286) (0.9343) (0.0000)**
Democracy Portfolio(G<=5)
Test Statistics 11.4388 21.5912 23.3253 25.2501 0.0006 0.1448 25.0809
P Value (0.0000)** (0.0000)** (0.0000)** (0.0000)** (0.9810) (0.7035) (0.0000)**
Dictatorship Portfolio(G>=14)
Test Statistics 24.7277 39.9492 46.5078 54.5841 0.1559 0.0400 54.5294
P Value (0.0000)** (0.0000)** (0.0000)** (0.0000)** (0.6930) (0.8415) (0.0000)**
54
Table 8
Sharpe Ratios and Properties of Tangency and Global Minimum-Variance Portfolios Before and
Sharpe Ratios and Properties of Tangency and Global Minimum-Variance Portfolios Before and