Learning and the Disappearing Association Between Governance and Returns

Study by Lucian A. Bebchuk, Alma Cohen, and  Charles C.Y. Wang finds the governance provisions (G-Index) used by Gompers, Ishii, and Metrick (2003) that showed abnormal returns during the 1991-1999 period was no longer associated with abnormal returns during the period of 2000-2008.

Consistent with the learning hypothesis, they document that (i) attention to corporate governance from the media, institutional investors, and researchers has exploded in the beginning of the 2000s and remained on a high level since then, and (ii) until the beginning of the 2000s, but not subsequently, market participants were more positively surprised by the earning announcements of good-governance firms than by those of poor-governance firms.