Corporate Governance and the Informational Efficiency of Asset Price
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In this study we analyze how the informational efficiency of price (IEP) varies with the firm's governance structure. We conjecture that governance standards in different categories are likely to present different incentives to managers and directors and thus have different impacts on IEP. We classify governance standards into the following three categories: board effectiveness, openness to takeovers, and ownership and compensation structure. Our empirical results show that IEP is greater for firms with higher governance standards for board effectiveness. This result is consistent with our conjecture that higher standards for board effectiveness lead to higher financial and operational transparency through better managerial monitoring. We find that IEP decreases with openness to takeovers. This result supports the idea that firms with fewer anti-takeover provisions have higher probabilities of becoming a takeover target, and managers of these firms have greater incentives to engage in activities that reduce transparency. We show that IEP is lower for firms with higher governance standards for ownership and compensation structure for managers and directors. This result supports the idea that close alignments between managerial compensation/wealth and firm value may increase managerial incentives to reduce transparency. We perform a number of robustness checks and show that our main results are robust. For instance, we show that our main results are intact after controlling for the endogeneity problem, analyst following, institutional ownership, and stock market liquidity. Overall, these results are consistent with our conjecture that different governance standards present different incentives to managers and directors and thus exert different influences on transparency and market efficiency.