Making the Most of Good Times: Shareholder Rights and Performance Revisited
Dec. 1, 2014
I provide a new explanation for the abnormal returns to governance and their disappearance after 2001 by demonstrating that firms with strong shareholder rights capture higher profits than their industry peers only when their industry is experiencing high profitability. Importantly, I also show that this pattern is anticipated by investors. Consistent with such expectations, and with an updating of valuations as anticipated industry conditions change, positive abnormal stock returns to good governance are concentrated in periods of high industry returns, and are at least partially reversed during industry downturns. Additional evidence supports a causal interpretation of the results.