Governance, Information Flow and Stock Returns: Evidence from a Natural Experiment

60 Pages Posted: 1 May 2018 Last revised: 14 Aug 2019

See all articles by Ariadna Dumitrescu

Ariadna Dumitrescu

ESADE Business School

Mohammed Zakriya

ESADE Business School, Ramon Llull University

Date Written: July 20, 2019

Abstract

We show that governance information is useful for investors but not as previously envisaged. Poor governance stocks outperform good governance ones after 2008, also implying that the disappearance of governance – stock returns relationship documented in Bebchuk, Cohen, and Wang (2013) is temporary. We hypothesize that learning helps sophisticated investors recognize governance risks and become more prudent after the global financial crisis. Exploiting an exogenous shock to the governance information flow, we find support for our hypothesis. Subsequent tests confirm that learning via the price and risk channels helped investors recognize the uncertainty surrounding poorly governed firms’ future earnings powers.

Keywords: Institutional investors, learning, corporate governance, antitakeover provisions, E-Index, managerial entrenchment

JEL Classification: G14, G30, G34

Suggested Citation

Dumitrescu, Ariadna and Zakriya, Mohammed, Governance, Information Flow and Stock Returns: Evidence from a Natural Experiment (July 20, 2019). Available at SSRN: https://ssrn.com/abstract=3170881 or http://dx.doi.org/10.2139/ssrn.3170881

Ariadna Dumitrescu

ESADE Business School ( email )

Av. Pedralbes 60-62
Barcelona, 08034
Spain

Mohammed Zakriya (Contact Author)

ESADE Business School, Ramon Llull University ( email )

Av. de Pedralbes, 60-62
Barcelona, 08034
Spain

HOME PAGE: http://www.esade.edu/research-webs/eng/gref

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