یادگیری و محو شدن ارتباط بین حکومت و بازده

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.

In an influential paper, Gompers, Ishii, and Metrick (2003) (hereinafter GIM) identified a governance-based trading strategy that would have produced abnormal profits during the period 1990–1999. This strategy was based on a G-Index that GIM constructed on the basis of 24 governance provisions that weaken shareholder rights. Bebchuk, Cohen, and Ferrell (2009) (hereinafter BCF) subsequently showed that these results were driven by 6 out of the 24 provisions and constructed an E-Index based on these 6 provisions. The intriguing correlation between governance and returns has attracted a great deal of attention ever since it was first reported, and the G-Index and E-Index have been extensively used. In this paper, we contribute to understanding GIM's and BCF's results concerning the association between governance and abnormal returns. We show that the G-Index and E-Index were no longer associated with abnormal returns during the period of 2000–2008 (or any subperiods within it), and we then investigate what explains both the existence of the governance–returns correlation during the 1990s and its subsequent disappearance. We identify several systematic differences between the 1990s and subsequent years and relate them to the disappearance of the governance–returns correlation. We provide evidence that is consistent with the hypothesis that both the existence and disappearance of the correlation were due to market participants' learning to appreciate the difference between well-governed and poorly governed firms. GIM and BCF found that governance provisions—or the characteristics of firms' governance and culture that they reflect—are associated with lower industry-adjusted Q. Subsequent work found additional links between the G and E indices and firm performance. For example, Masulis, Wang, and Xie (2007) find that worse G-Index and E-Index scores are correlated with worse acquisition decisions (as measured by the stock market returns accompanying acquisition announcements), and Dittmar and Mahrt-Smith (2007) find that worse scores are correlated with a less valuable use of cash holdings. That the G-Index and E-Index are associated with lower firm value and worse firm performance, however, does not imply that these indices should be associated with abnormal stock returns, as GIM and BCF found for the period 1990–1999. To the extent that market prices already reflect fully the differences between well-governed and poorly governed firms, trading on the basis of the governance indices should not be expected to yield abnormal profits. We conduct in this paper a series of tests for one possible explanation of the abnormal returns during the 1990s. According to this “learning” explanation, which was noted by GIM, investors in 1990 did not fully appreciate the differences between firms with good and poor governance scores. The legal developments that shaped the significance of the G-Index and E-Index provisions took place largely during the 1980s, which was also when many of these provisions were adopted. In 1990, investors might not yet have had sufficient experience to be able to forecast the expected difference in performance between well-governed and poorly governed firms. Under the “learning” hypothesis, the association between governance indices and returns during the 1990s was expected to continue only up to the point at which a sufficient number of market participants would learn to fully appreciate the differences between well-governed and poorly governed firms. Noting the empirical evidence that lengthy intervals are sometimes necessary even for information that is relatively tangible to be incorporated in prices,1 GIM suggested that it was not possible at the time of their article to forecast when such a process of price adjustment would be completed. We begin by showing that, consistent with the learning hypothesis, the association between the governance indices did not persist. Using the exact methods employed by GIM (and subsequently BCF) for 1990–1999, we find that this association did not exist during the subsequent period of 2000–2008. Core, Guay, and Rusticus (2006) note that the GIM strategy did not produce abnormal returns during the four-year period 2000–2003, but were naturally cautious about drawing inferences from the relatively short period they examined, and did not focus on the change or seek to explain it. Our robust findings for a period of similar length to the one studied by GIM enable concluding that the documented governance–returns association did not persist after the 1990s. Note that, to the extent that the disappearance of abnormal returns was due to learning, such learning did not necessarily have to involve learning about the significance of the provisions in the governance indices. While some market participants might have learned to appreciate that certain governance provisions are associated with worse expected performance, other market participants might have directly identified the differences in future performance between the firms that score well and poorly on the governance indices. For our purposes, the learning hypothesis involves market participants, in the aggregate, coming to appreciate the difference between firms that score well and poorly on the governance indices regardless of whether all or some of these participants made use of all the components of the indices themselves. To investigate further the learning hypothesis, we study how the existence of abnormal returns to governance strategies was associated with changes in the attention paid to governance by market participants. We identify proxies for the attention to governance by the media, institutional investors, and academic researchers, as well as construct an aggregate attention index. We find that the decrease in the returns to the governance strategies was associated with an increase in levels of attention to governance. Furthermore, analyzing potential structural breaking points in the pattern of returns, we find that their location corresponds to the period in which attention to governance rose sharply. The number of media articles about governance, and the number of resolutions about corporate governance submitted by institutional investors (many of which focused on key provisions of the governance indices), jumped sharply in the beginning of the 2000s to historically high levels and remained there. Academic research, proxied by the fraction of National Bureau of Economic Research (NBER) discussion papers related to corporate governance, also rose sharply around this point in time, with the GIM paper being issued as an NBER discussion paper in 2001. Given our findings about the relationship between attention to governance and returns to the governance strategies, we proceed to test the hypothesis that, by the end of 2001, markets had sufficiently absorbed the governance differences reflected in the G-Index and the E-Index. We examine whether, by the end of 2001, market participants learned to appreciate the differences between well-governed firms and poorly governed firms in terms of their expected future profitability. In particular, we examine the extent to which markets were differentially surprised by earning announcements as proxied by (i) the abnormal reactions accompanying earning announcements, and (ii) analyst forecast errors. Consistent with the learning hypothesis, we find a marked difference between the 1990–2001 and 2002–2008 periods. During the 1990–2001 period, but not during the 2002–2008 period, the earning announcements of good-governance firms were more likely than the earning announcements of poor-governance firms both (i) to be accompanied with more positive abnormal stock returns, and (ii) to produce a meaningful positive surprise relative to the median analyst forecast. Our analysis here extends the studies of Core, Guay, and Rusticus (2006) and Giroud and Mueller (2011), which examine (with mixed results) whether the correlation between governance and returns was due to markets' forecasting errors about the difference between good-governance and poor-governance firms, but which did not consider whether such forecasting errors changed over time during the 1990–2008 period. Under the learning hypothesis, while the governance indices can be expected at some point to cease to be correlated with abnormal trading profits, as their relevance for firm value and performance become incorporated into market prices, the correlation of these indices with firm value and performance can be expected to persist. We find that, indeed, the relationship that the governance indices have with Tobin's Q and various measures of operating performance remained strong during the 2000s (and, if anything, becomes more significant in the 2002–2008 period).2 Thus, while governance indices may no longer be able to provide a basis for a profitable trading strategy, they should remain valuable tools for researchers, investors, and policymakers interested in governance and its relationship with firm performance. We also explore an alternative explanation that has been suggested in the literature to the correlation between governance and returns identified for the 1990s. Under this explanation, governance is correlated with some common risk factor that is not captured by the standard four-factor model used by GIM to calculate abnormal returns (Core et al., 2006 and Cremers et al., 2009). Under this explanation, governance can be expected to continue to play a role in explaining the cross-section of returns as long as the common risk factor correlated with governance continues to have such a role. To investigate this possibility, we examine the consequences of augmenting the Fama-French-Carhart four-factor model with additional common factors suggested in the literature—the liquidity factor of Pastor and Stambaugh (2003), the downside risk factor of Ang, Chen, and Xing (2006), and the takeover factor of Cremers, Nair, and John, (2009). We find that adding these factors cannot fully explain both the existence of the governance–returns correlation and its subsequent disappearance. Finally, we conduct three types of robustness checks for our results concerning how the periods 1990–2001 and 2002–2008 differ in terms of the association of abnormal returns with the governance indices, as well as in the ability of investors and analysts to forecast the differences in expected future earnings between good-governance and poor-governance firms. In particular, we examine whether our results are robust to excluding new economy firms (Murphy, 2003), to excluding firms in the most competitive industries (Giroud and Mueller, 2011), and to adjusting returns to take into account industry effects (Johnson et al., 2009 and Lewellen and Metrick, 2010). Our findings concerning the differences between 1990–2001 and 2002–2008 are all robust to these issues.3 In addition to the literature on governance indices and governance provisions, our paper is related to the large body of asset pricing and behavioral finance literature on the persistence and disappearance of abnormal returns associated with trading strategies based on public information. Trading strategies based on known information that produce risk-adjusted abnormal returns over significant periods of time have sometimes been labeled as “anomalies” (see, e.g., Schwert, 2003). Researchers have paid close attention to the extent to which such “anomalies” have persisted after they were documented by academic research, with some suggesting that it is reasonable to expect anomalies not to persist for long after they are reported (Cochrane, 1999). While classical efficient capital market theory (Fama, 1970) questions whether public information can ever be used to produce abnormal returns, adaptive efficient capital market theory (Daniel and Titman, 1999) suggests that the ability of any trading strategy based on public information to generate risk-adjusted abnormal profits will dissipate over time. Estimating the future effects of (publicly known) governance provisions (or governance characteristics correlated with them) is far from a straightforward matter, and requires not only knowing the public information about the provisions but also plugging it into an appropriate structural model of the firms and their environment. Our evidence is consistent with such a process being one that takes time to develop, refine, and accurately execute. As Brav and Heaton (2002) show, such a pattern is consistent with two models (that are difficult to distinguish empirically): (i) a “rational structure uncertainty” model in which all agents were uncertain in 1990 what structural model to use to make rational predictions from available public information, but learned to do so over time; and (ii) a “behavioral” model in which some rational investors (but not others) were able to draw accurate inferences from governance provisions already in 1990, but “limits on arbitrage” (Shleifer and Vishny, 1997) prevented their information from being fully reflected in prices, and in which, over time, such rational investors grew sufficiently in number and confidence for their information to be factored into market prices. The remainder of the paper is organized as follows. Section 2 examines the relationship between the governance indices and returns during the 1990–2008 period. Section 3, the main part of our analysis, investigates the causes of both the existence of a governance–returns association during the 1990s and its subsequent disappearance. Section 4 concludes.

This paper has sought to help resolve the questions arising from the well-known and intriguing finding of an association between abnormal returns during the 1990s and the G-Index and E-Index governance indices. After showing that the association ceased to exist during the 2000s, we provided evidence that can help explain both the existence of the association during the 1990s and its subsequent disappearance. In particular, our analysis provides evidence consistent with the hypothesis that both the existence and disappearance of the governance–returns correlation were due to market participants' learning during the 1990s 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) the structural break in the returns to governance strategies corresponded to the timing of the sharp rise in the attention to governance; (iii) until the beginning of the 2000s, but not subsequently, stock market reactions to earnings announcements reflected the market being more positively surprised by the earnings announcements of good-governance firms than by those of poor-governance firms; (iv) analysts were also more positively surprised by the earnings announcements of good-governance firms than by those of poor-governance firms until the beginning of the 2000s but not afterwards; (v) while the G and E indices could no longer generate abnormal returns in the 2000s, their negative association with Tobin's Q and operating performance persisted; and (vi) the existence and subsequent disappearance of the governance–return correlation cannot be explained by any of the factors that have been suggested in the literature for augmenting the Fama-French-Carhart four-factor model. Our results are robust to excluding new economy firms, excluding firms in non-competitive industries, and adjusting for industry returns. By explaining both the presence during the 1990s and the subsequent disappearance of a correlation between returns and the governance indices, our findings resolve a puzzle posed by the existing literature. However, by showing that the governance indices remain associated with firm value and operating performance notwithstanding the disappearance of their correlation with returns, our work indicates that these indices continue to offer a potentially effective tool for researchers and market participants. We hope that our findings will be useful to subsequent work on corporate governance and on learning in capital markets.