Feb 21, 2013
from 11:00 AM to 12:30 PM
|Contact Name||Camilla Burgess|
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“Making the Most of Good Times: Shareholder Rights and Performance Revisited”
Tara Bhandari, MIT Sloan School of Management
I demonstrate that the relationship between corporate governance and firm performance varies with industry performance cycles. Well-governed firms, as classified by the shareholder rights index of Gompers, Ishii and Metrick (2003), outperform only in good times. Specifically, positive abnormal stock returns to good governance are concentrated in periods of high industry returns, and are at least partially reversed during industry downturns. In terms of operating performance, well-governed firms outperform relative to poorly-governed firms in the same industry during highly profitable periods, but both groups have similar operating performance during weak industry conditions. This pattern of performance seems to be expected by investors, suggesting that the higher valuations of well-governed firms (as measured by Tobin’s Q) are due to higher expected productivity in good times. In turn, the more symmetric pattern of returns may reflect updating of valuations as expectations of such good operating outcomes change, providing an alternative to learning and static risk theories in explaining the apparent abnormal returns to governance and their disappearance after 2001.