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RFS Advance Access originally published online on April 6, 2009
Review of Financial Studies 2009 22(11):4753-4786; doi:10.1093/rfs/hhp018
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© The Author 2009. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org.

A Reexamination of Corporate Governance and Equity Prices

Shane A. Johnson
Mays Business School, Texas A&M University

Theodore C. Moorman
Department of Finance, Northern Illinois University

Sorin Sorescu
Mays Business School, Texas A&M University

Send correspondence to Shane A. Johnson, Mays Business School, Texas A&M University, Mailstop 4218, College Station, TX 77843-4218; telephone: (979) 862-3318; fax: (979) 845-3884. E-mail: shaneajohnson{at}tamu.edu.

JEL Classification: C1, C52, G11, G12, G14, G34


  Abstract

We reexamine long-term abnormal returns for portfolios sorted on governance characteristics. Firms with strong shareholder rights and firms with weak shareholder rights differ from the population of firms and from each other in how they cluster across industries. Using well-specified tests under this industry clustering, we find statistically zero long-term abnormal returns for portfolios sorted on governance. Our results have important implications for interpreting studies that link governance to firm value and stock returns, demonstrate the importance of the coarseness of industry definitions in financial research, and shed light on addressing statistical problems created by industry clustering in samples.

This work grew out of Chapter II of Moorman's dissertation at Texas A&M University. We thank Kerry Back, David Blackwell, Ekkehart Boehmer, Daniel Bradley, Daniel Chi, Marcia Cornett, Bart Danielsen, Richard Dowen, Ahmad Etebari, Mark Flannery, Mike Gallmeyer, Brian Hatch, Afshad Irani, Gerald Jensen, Jason Karcesky, Fred Kaen, Paul Kupiec, Scott Lee, Ken Lehn, Bill Maxwell, Andrew Metrick, Bob Miller, Angela Morgan, Jim Musumeci, Matt O’Connor, Mark Peterson, Christo Pirinsky, Bob Porter, Matt Rafferty, Jay Ritter, Chip Ryan, Avanidhar Subrahmanyam, Xiaoxin Wang, an anonymous referee, and seminar participants at the 2007 American Finance Association Annual Meeting, Clemson University, University of Florida, FDIC, Northern Illinois University, Quinnipiac University, Southern Illinois University, Southern Methodist University, University of New Hampshire, and Texas A&M University for helpful comments.


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