| Summary: | The objective of this paper is to discuss some of the main areas of importance in corporate governance, and test them against stock returns and performance measures, in an effort to establish whether any indication of a relationship exists there upon. Using data and annual reports of 18 listed Icelandic companies, I construct a governance index based on variables thought to be of high importance in corporate governance. The governance index is then put to test using stock returns and performance ratios as measurements. Empirical researches have shown evidence that good corporate governance practices matter, as both stock returns of a portfolio of 'better governed' firms returns superior returns. My findings support those researches and regression analysis also indicates that a relationship exists between governance and firm performance as measured by accounting based measures. Due to a small sample size and circumstances in the market during the test period, results should be taken with caution and ideas for further study are provided.
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