Abstract

http://ssrn.com/abstract=1593911
 
 

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Learning and the Disappearing Association between Governance and Returns


Lucian A. Bebchuk


Harvard Law School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)

Alma Cohen


Tel Aviv University - Eitan Berglas School of Economics; Harvard Law School; National Bureau of Economic Research (NBER)

Charles C. Y. Wang


Harvard Business School

April 2010

NBER Working Paper No. w15912

Abstract:     
In an important and influential work, Gompers, Ishii, and Metrick (2003) show that a trading strategy based on an index of 24 governance provisions (G-Index) would have earned abnormal returns during the 1991-1999 period, and this intriguing finding has attracted much attention ever since it was reported. We show that the G-Index (as well as the E-Index based on a subset of the six provisions that matter the most) was no longer associated with abnormal returns during the period of 2000-2008, or any sub- periods within it, and we provide evidence consistent with the hypothesis that the disappearance of the governance-returns association was due to market participants’ learning to appreciate the difference between firms scoring well and poorly on the governance indices. Consistent with the learning hypothesis, we document that (i) attention to corporate governance from the media, institutional investors, and researchers has exploded in the beginning of the 2000s and remained on a high level since then, and (ii) until the beginning of the 2000s, but not subsequently, market participants were more positively surprised by the earning announcements of good-governance firms than by those of poor-governance firms. Our results are robust to excluding new economy firms or to focusing solely on firms in non- competitive industries. While the G and E indices could no longer generate abnormal returns in the 2000s, their negative association with Tobin’s Q persists and they thus remain valuable tools for researchers, policymakers, and investors.

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Date posted: April 26, 2010  

Suggested Citation

Bebchuk, Lucian A. and Cohen, Alma and Wang, Charles C. Y., Learning and the Disappearing Association between Governance and Returns (April 2010). NBER Working Paper No. w15912. Available at SSRN: http://ssrn.com/abstract=1593911

Contact Information

Lucian A. Bebchuk (Contact Author)
Harvard Law School ( email )
Cambridge, MA 02138
United States
617-495-3138 (Phone)
617-812-0554 (Fax)
HOME PAGE: http://www.law.harvard.edu/faculty/bebchuk/
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)
Alma Cohen
Tel Aviv University - Eitan Berglas School of Economics ( email )
Ramat Aviv, Tel Aviv, 69978
Israel
Harvard Law School ( email )
Cambridge, MA 02138
United States
(617) 496-4099 (Phone)
(617) 812-0554 (Fax)
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Charles C. Y. Wang
Harvard Business School ( email )
Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States
Feedback to SSRN


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