Bebchuk, Cohen, and Wang (2013)
Bebchuk, Lucian, Alma Cohen, and Charles C.Y. Wang. “Learning and the Disappearing Association Between Governance and Returns.” Journal of Financial Economics, May 2013.
From the authors' abstract: "During the period 1991-1999, stock returns were correlated with the G-Index based on twenty-four governance provisions (Gompers, Ishii, and Metrick (2003)) and the E-Index based on the six provisions that matter most (Bebchuk, Cohen, and Ferrell (2009)). This correlation, however, did not persist during the subsequent period 2000-2008. We provide evidence that both the identified correlation and its subsequent disappearance were due to market participants’ gradually learning to appreciate the difference between firms scoring well and poorly on the governance indices."
LK comment: Strong, noteworthy paper. This is a clear account of how we might expect other ESG effects to work. An anomaly is identified, trading strategies are devised to take advantage of it, and ultimately the effect is arbitraged away. Note, however, that the market has not become efficient with respect to governance, it has become efficient with respect to certain governance ratings. Development of better ratings might potentially create additional opportunities for traders.
Link (working paper): https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1589731
Link (publshed version): https://www.hbs.edu/faculty/Pages/item.aspx?num=42799