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Corporate Governance, Idiosyncratic Risk, and Information FlowMiguel A. FerreiraNova School of Business and Economics; European Corporate Governance Institute (ECGI) Paul A. LauxUniversity of Delaware - Alfred Lerner College of Business and Economics December 2005 AFA 2006 Boston Meetings Paper Abstract: We study the relationship of corporate governance policy and idiosyncratic risk in stock returns. Firms with fewer anti-takeover provisions display higher levels of idiosyncratic risk, trading activity, private information flow, and more information about future earnings in stock prices. Trading interest by institutions, especially those active in merger arbitrage, strengthens the relationship of governance to idiosyncratic risk. Our results indicate that openness to the market for corporate control leads to more informative stock prices by encouraging collection of and trading on private information. Consistent with an information-flow interpretation, the component of volatility unrelated to governance is associated with the efficiency of corporate investment.
Number of Pages in PDF File: 50 Keywords: Corporate governance, Takeovers, Idiosyncratic risk, Institutional investors, Capital budgeting JEL Classification: F3, G1, O4 working papers seriesDate posted: November 18, 2004Suggested CitationContact Information
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