Corporate governance and stock return volatility : A temporary component perspective



Using the variance ratio, this paper shows that stocks with fewer antitakeover provisions have a larger fraction of their return volatility attributable to a temporary component than stocks with more such protections. This finding suggests that the greater openness to the market for corporate control renders an otherwise short-lived shock capitalized into stock price. Conversely, the result implies that antitakeover provisions block private information flow from being incorporated into stock price until it depreciates away. Our analysis thus completes the explanation for the inverse relationship between average stock return volatility and the number of takeover protections. We also discuss how our analysis helps rationalize two different uses of idiosyncratic stock return volatility, i.e., as a proxy for private information flow and for arbitrage risk.


 1. Introduction
 2. Hypothesis development
  2.1. An illustrative example
  2.2. A formal setup
  2.3. Hypothesis
  2.4. Embellishments of the hypothesis
 3. Sample and data
 4. Empirical results
  4.1. Summary statistics
  4.2. Univariate analysis – total return
  4.3. Univariate analysis – idiosyncratic return
  4.4. Multivariate analysis
  4.5. Portfolio analysis
 5. Conclusions


  • Joon Chae Seoul National University
  • Dong Wook Lee Korea University Business School
  • Shu Feng Wang Seoul National University


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