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Learning and the disappearing association between governance and returns

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  • Bebchuk, Lucian A.
  • Cohen, Alma
  • Wang, Charles C.Y.

Abstract

The correlation between governance indices and abnormal returns documented for 1990–1999 subsequently disappeared. The correlation and its disappearance are both due to market participants' gradually learning to appreciate the difference between good-governance and poor-governance firms. Consistent with learning, the correlation's disappearance was associated with increases in market participants' attention to governance; market participants and security analysts were, until the beginning of the 2000s but not subsequently, more positively surprised by the earning announcements of good-governance firms; and, although governance indices no longer generated abnormal returns during the 2000s, their negative association with firm value and operating performance persisted.

Suggested Citation

  • Bebchuk, Lucian A. & Cohen, Alma & Wang, Charles C.Y., 2013. "Learning and the disappearing association between governance and returns," Journal of Financial Economics, Elsevier, vol. 108(2), pages 323-348.
  • Handle: RePEc:eee:jfinec:v:108:y:2013:i:2:p:323-348
    DOI: 10.1016/j.jfineco.2012.10.004
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    More about this item

    Keywords

    Corporate governance; Governance indices; GIM; G-Index; E-Index; Shareholder rights; Entrenchment; Market efficiency; Learning; Earning announcements; Analyst forecasts; IRRC provisions; Behavioral finance; Asset pricing;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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