Gawer, Joseph. “Corporate Governance Changes, Biases and Stock Returns.” Working paper (Université Paris Dauphine, Natixis Asset Management), June 29, 2010.
From the author's abstract: "This paper... [examines] the relationship between revisions in corporate governance’s scores and subsequent equity returns.
"I investigate this issue by tracing the market reaction to changes in Corporate Governance (CG) scores over the period 1999-2009 for the 600 companies included in the European index Dow Jones Stoxx 600. The data come from two purpose-built samples of equities of upward and downward revisions in CG scores. In order to take into account the presence of biases in stock markets including size, valuation or price momentum effects, I use specific reference portfolios in our event-study to determine the long-term performances.
"This paper presents three main findings. (1) The absence of post-event long-term over-performance is robust for companies with upward revisions in CG scores. (2) The robustness of long-term underperformance is confirmed for the companies with downward revisions in CG scores. (3) The negative abnormal returns obtained over the 24 months following downward revisions are characterized by weak and stable tracking-error volatility during all the post-event period. Thus, the use of the market underreaction to downward revisions in corporate governance scores could be an effective investment strategy."