The purpose of this study is to test whether including a corporate governance factor (PMG) in the Fama-French five-factor model helps explain stock returns in Taiwan's stock market. We used the publicly traded companies in Taiwan as the sample and use the corporate governance (CG) evaluation results as the proxy of PMG variable. Our results suggest that the refined models better explain the differences in stock returns, given the governance factor as constructed. We also provide evidence that expected stock returns are positively related to firm-level CG. This result is consistent with intuition from agency theory that better CG reduces the expected return on equity to the extent that it reduces shareholders' monitoring and auditing cost. Overall, our results support that governance factor should be an important factor beyond the five factors used in Fama and French's model.
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