Governance, Information Flow and Stock Returns: Evidence from a Natural Experiment

We show that governance information is useful for investors but not as previously envisaged. Poor governance stocks outperform good governance ones after 2008, also implying that the disappearance of governance – stock returns relationship documented in Bebchuk, Cohen, and Wang (2013) is temporary. We hypothesize that learning helps sophisticated investors recognize governance risks and become more prudent after the global financial crisis. Exploiting an exogenous shock to the governance information flow, we find support for our hypothesis. Subsequent tests confirm that learning via the price and risk channels helped investors recognize the uncertainty surrounding poorly governed firms’ future earnings powers.