Abstract

http://ssrn.com/abstract=533582
 
 

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Does Weak Governance Cause Weak Stock Returns? An Examination of Firm Operating Performance and Investors' Expectations


John E. Core


Massachusetts Institute of Technology (MIT) - Sloan School of Management

Wayne R. Guay


University of Pennsylvania - Accounting Department

Tjomme O. Rusticus


London Business School; Northwestern University - Kellogg School of Management

September 2004


Abstract:     
We investigate Gompers, Ishii, and Metrick's (2003) finding that firms with weak shareholder rights exhibit significant stock market underperformance. If the relation between poor governance and poor returns is causal, we expect that the market is negatively surprised by the poor operating performance of weak governance firms. We find that firms with weak shareholder rights exhibit significant operating underperformance. However, analysts' forecast errors and earnings announcement returns show no evidence that this underperformance surprises the market. Our results are robust to controls for takeover activity. Overall, our results do not support the hypothesis that weak governance causes poor stock returns.

This is a revised version of a paper previously titled 'Does Weak Governance Cause Weak Stock Returns? An Examination of Firm Operating Performance and Analysts' Expectations' that was originally posted on April 21, 2004.

Number of Pages in PDF File: 51

Keywords: Corporate Governance, Market Efficiency, Analysts

JEL Classification: G12, G14, G34, G29

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Date posted: April 21, 2004  

Suggested Citation

Core, John E. and Guay, Wayne R. and Rusticus, Tjomme O., Does Weak Governance Cause Weak Stock Returns? An Examination of Firm Operating Performance and Investors' Expectations (September 2004). Available at SSRN: http://ssrn.com/abstract=533582 or http://dx.doi.org/10.2139/ssrn.533582

Contact Information

John E. Core
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
77 Massachusetts Ave.
E62-416
Cambridge, MA 02138
United States
Wayne R. Guay
University of Pennsylvania - Accounting Department ( email )
3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-7775 (Phone)
215-573-2054 (Fax)

Tjomme O. Rusticus (Contact Author)
London Business School ( email )
Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
Northwestern University - Kellogg School of Management ( email )
2001 Sheridan Road
Evanston, IL 60208
United States
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