Corporate Governance, Idiosyncratic Risk, and Information Flow

Ferreira, Miguel A.; Laux, Paul A.

doi:10.2139/ssrn.620822

Corporate Governance, Idiosyncratic Risk, and Information Flow

AFA 2006 Boston Meetings Paper

50 Pages Posted: 18 Nov 2004

See all articles by Miguel A. Ferreira

Miguel A. Ferreira

Nova School of Business and Economics; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Paul A. Laux

University of Delaware - Alfred Lerner College of Business and Economics

There are 2 versions of this paper

Date Written: December 2005

Abstract

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.

Keywords: Corporate governance, Takeovers, Idiosyncratic risk, Institutional investors, Capital budgeting

JEL Classification: F3, G1, O4

Suggested Citation: Suggested Citation

Ferreira, Miguel Almeida and Laux, Paul A., Corporate Governance, Idiosyncratic Risk, and Information Flow (December 2005). AFA 2006 Boston Meetings Paper. Available at SSRN: https://ssrn.com/abstract=620822 or http://dx.doi.org/10.2139/ssrn.620822