Corporate Governance, Idiosyncratic Risk, and Information Flow

Posted: 8 May 2007

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

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Abstract

We study the relationship of corporate governance policy and idiosyncratic risk. Firms with fewer antitakeover provisions display higher levels of idiosyncratic risk, trading activity, private information flow, and 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.

Suggested Citation

Ferreira, Miguel Almeida and Laux, Paul A., Corporate Governance, Idiosyncratic Risk, and Information Flow. Journal of Finance, Vol. 62, No. 2, pp. 951-990, April 2007. Available at SSRN: https://ssrn.com/abstract=984761

Miguel Almeida Ferreira (Contact Author)

Nova School of Business and Economics ( email )

Campus de Campolide
Lisbon, 1099-032
Portugal

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Paul A. Laux

University of Delaware - Alfred Lerner College of Business and Economics ( email )

Office 306 Purnell Hall
Newark, DE 19716
United States
302-831-6598 (Phone)
302-831-3061 (Fax)

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