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A Reexamination of Corporate Governance and Equity PricesShane A. JohnsonTexas A&M University - Department of Finance Theodore C. MoormanBaylor University - Department of Finance, Insurance & Real Estate Sorin M. SorescuTexas A&M University - Department of Finance May 5, 2008 AFA 2007 Chicago Meetings Paper Abstract: We reexamine long-term abnormal returns for portfolios sorted on governance characteristics. Firms with strong shareholder rights and firms with weak shareholder rights differ from the general population of firms and from each other in how they cluster across industries. Using tests that are well specified under this industry clustering, we find statistically zero long-term abnormal returns for portfolios sorted on governance. Our results have important implications for interpreting studies that link governance to firm value and stock returns, demonstrate the importance of the coarseness of industry definitions in financial research, and shed light on addressing statistical problems created by industry clustering in samples.
Number of Pages in PDF File: 78 Keywords: corporate governance, stock returns, industry, simulation, market efficiency JEL Classification: G12, G14, G34, C15 working papers seriesDate posted: March 22, 2005 ; Last revised: October 18, 2011Suggested CitationContact Information
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