Idiosyncratic Risk, Governance and Equity Performance
21 Pages Posted: 24 Aug 2010 Last revised: 27 Aug 2010
Date Written: August 25, 2010
We use a sample of democratic firms (with 5 or less anti-takeover provisions) from the Investor Responsibility Research Center (IRRC) database and use idiosyncratic volatility as a proxy for information from the market of corporate control as in Ferreira and Laux (2007) to link the equity performance, market of corporate control and corporate governance. We find that firms which are the least vulnerable to takeover threat (the least idiosyncratic risk) outperform the others. We also find that market information of takeover vulnerability is negatively related to future merger and acquisition shocks. All these effects are mitigated by the Sarbanes-Oxley Act 2002.
Keywords: Idiosyncratic Risk, Merge and Acquisition, Corporate Governance
JEL Classification: G14, G18
Suggested Citation: Suggested Citation