Value–based Management Systems, Corporate Governance and Firm Performance — A Panel Data Analysis∗

We examine the stock market performance of firms that have implemented value–based management systems. Using a novel and hand–collected panel data set covering 1,083 firm years of large German firms between 2002 and 2008 we find that firms which have adopted value–based management systems earn superior stock market returns. For instance, a simple investment strategy investing only in firms using a value–based management system would have earned risk–adjusted abnormal returns of 11.4% per year during the sample period. Moreover, we find that firms with value–based management systems show higher operative performance and higher market valuation. When we examine which firms have actually implemented value–based management systems we find that firms with higher agency costs are more likely to use such mechanisms. We also show that firms with high agency costs, proxied by large free float, are the ones with the largest improvement in stock market returns, suggesting that value–based management systems are an effective governance mechanism. JEL classification: G34 · G30· G38