Corporate Governance, Idiosyncratic Risk, and Information Flow
Miguel A. Ferreira
Nova School of Business and Economics; European Corporate Governance Institute (ECGI)
Paul A. Laux
University of Delaware - Alfred Lerner College of Business and Economics
AFA 2006 Boston Meetings Paper
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
Date posted: November 18, 2004
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