Nonprofessional Investors’ Perceptions of Corporate Governance Factors

At a fundamental level, corporate governance mechanisms promote ethical business relationships and actions. Having the proper governance mechanisms in place is especially important to the less informed, nonprofessional class of investors who may not have the ability, power or influence to monitor management. This paper presents a study of nonprofessional investors' perceptions of the importance of corporate governance mechanisms. Based on prior literature and archival studies of corporate governance mechanisms, four broad categories of corporate governance are identified. A survey assessing investors' perceptions of 22 corporate governance mechanisms from these broad categories was administered to 438 participants. The results from factor analysis indicate that a 10-factor solution best describes the constructs underlying investors' perceptions of the 22 corporate governance mechanisms included in this survey. This measure is compared to corporate governance measures developed in prior literature from factor analyses of archival data. The comparison reveals several similarities between these measures and highlights areas of corporate governance that are important to investors but are not fully addressed or included in the archival studies. The information provided about investors' perceptions of corporate governance mechanisms and the measure of corporate governance developed in this paper will be useful in aiding the design of future research investigating investors' reactions to corporate governance information