Corporate Governance and Equity Mispricing

Abstract:     
This paper examines how a firm's governance structure relates to mispricing of its stock. We hypothesize that when managers are empowered, temporary mispricing of the stock is corrected more slowly. To detect correction of temporary mispricing, we examine mean reversion of stock returns and find that companies with more takeover protections experience slower mean reversion of stock returns. Mean reversion generally occurs faster following a negative return than after a positive return, and only after a negative return do we find the negative relationship between the number of takeover protections and the speed of mean reversion. The results are most pronounced in mid-sized and manufacturing firms.

Keywords: Corporate governance, equity mispricing, takeover protections, mean reversion

JEL Classifications: G10, G14, G30, G34

Working Paper Series