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Asian Review of Financial Research, Vol., No..
pp.495~515
pp.495~515
Corporate governance and stock return volatility : A temporary component perspective
Joon Chae Seoul National University
Dong Wook Lee Korea University Business School
Shu Feng Wang Seoul National University
Using the variance ratio, this paper shows that a larger portion of volatility is driven by a temporary component in stocks with fewer antitakeover provisions than in 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, it implies that antitakeover provisions block private information flow until it depreciates away. This finding completes the explanation for the inverse relationship between stock return volatility and the number of takeover protections. We also discuss how it helps rationalize two different uses of idiosyncratic stock return volatility, namely, as a proxy for private information flow and for arbitrage risk.
Joon Chae
Dong Wook Lee
Shu Feng Wang
Using the variance ratio, this paper shows that a larger portion of volatility is driven by a temporary component in stocks with fewer antitakeover provisions than in 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, it implies that antitakeover provisions block private information flow until it depreciates away. This finding completes the explanation for the inverse relationship between stock return volatility and the number of takeover protections. We also discuss how it helps rationalize two different uses of idiosyncratic stock return volatility, namely, as a proxy for private information flow and for arbitrage risk.
corporate governance,antitakeover provisions,stock return volatility,temporary component,variance ratio
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