Learning and the disappearing association between governance and returns

• Published in: Journal of financial economics 2013-05, Vol.108 (2), p.323-348
• Main Authors: Bebchuk, Lucian A., Cohen, Alma, Wang, Charles C.Y.
• Format: Article
• Language: English
• Subjects: Abnormal returns; Analyst forecasts; Asset pricing; Behavioral finance; Board of directors; Business management; Business valuation; Corporate governance; Correlation analysis; E-Index; Earning announcements; Earnings; Earnings announcements; Entrenchment; Financial economics; Firm value; G-Index; GIM; Governance indices; IRRC provisions; Learning; Market efficiency; Organizational behaviour; Organizational learning; Shareholder rights; Studies
• ISSN: 0304-405X; 1879-2774
• DOI: 10.1016/j.jfineco.2012.10.004

The correlation between governance indices and abnormal returns documented for 1990–1999 subsequently disappeared. The correlation and its disappearance are both due to market participants' gradually learning to appreciate the difference between good-governance and poor-governance firms. Consistent with learning, the correlation's disappearance was associated with increases in market participants' attention to governance; market participants and security analysts were, until the beginning of the 2000s but not subsequently, more positively surprised by the earning announcements of good-governance firms; and, although governance indices no longer generated abnormal returns during the 2000s, their negative association with firm value and operating performance persisted.