Learning and the Disappearing Association Between Governance and Returns

By L. Bebchuk, Alma Cohen, Charles C. Y. Wang. 2012

344 citations recorded by the source corpus.

During the period 1991-1999, stock returns were correlated with the G-Index based on twenty-four governance provisions (Gompers, Ishii, and Metrick (2003)) and the E-Index based on the six provisions that matter most (Bebchuk, Cohen, and Ferrell (2009)). This correlation, however, did not persist during the subsequent period 2000-2008. We provide evidence that both the identified correlation and its subsequent disappearance were due to market participants’ gradually learning to appreciate the difference between firms scoring well and poorly on the governance indices. Consistent with the learning hypothesis, we find that:(i) The disappearance of the governance-return correlation was associated with an increase in the attention to governance by a wide range of market participants; (ii) Until the beginning of the 2000s, but not subsequently, stock market reactions to earning announcements reflected the market’s being more positively surprised by the earning announcements of good-governance firms than by those of poor-governance firms; (iii) Stock analysts were also more positively surprised by the earning announcements of good-governance firms than by those of poor-governance firms until the beginning of the 2000s but not afterwards; (iv) While the G-Index and E-Index could no longer generate abnormal returns in the 2000s, their negative association with Tobin’s Q and operating performance persisted; and(v) The existence and subsequent disappearance of the governance-return correlation cannot be fully explained by additional common risk factors suggested in the literature for augmenting the Fame-French-Carhart four-factor model.___________________________________Gompers, Ishii, and Metrick (2003) is available on SSRN at:http://ssrn.com/abstract=278920Bebchuk, Cohen, and Ferrell (2009) is available on SSRN at:http://ssrn.com/abstract=593423

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/e357b645f7ae457c560ecc26ec02c6a4573b23ba

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In Accounting

1. M. Staunton
2. Kangtao Ye
3. P. Marsh
4. Ya‐Kai Chang
5. Jigao Zhu
6. Robin K. Chou
7. Tai-Hsin Huang
8. Kam C. Chan

In Finance

1. M. Staunton
2. Kangtao Ye
3. P. Marsh
4. Ya‐Kai Chang
5. Robin K. Chou
6. Tai-Hsin Huang
7. Kam C. Chan
8. E. Dimson

Citations in the corpus

• Divergent ESG Ratings (2020, methodology): “A paper by Bebchuk, Cohen and Wang (2013), which used the same methodology as the Gompers et al. study, found no association between the G-or E-indexes and abnormal returns during the 2000s or any sub-period within this decade.”
• Board Hierarchy, Independent Directors, and Firm Value: Evidence from China (2016, methodology): “Following prior research, we use Tobin’s Q as a proxy for firm value (Yermack 1996; Vafeas 1999; Coles, Daniel, and Naveen 2008; Gompers, Ishii, and Metrick 2010; Bebchuk, Cohen, and Wang 2013).”
• Corporate Governance and the Dynamics of Capital Structure: New Evidence (2014, background): “16 Bebchuk et al. (2013) argue that the effects of entrenchment may differ during different time periods.”