July 26, 2013
In an award ceremony held in New York City last month, the Investor Responsibility Research Center Institute (IRRCi) announced the winners of its the 2013 prize competition. The academic award went to Harvard Law School Professor Lucian Bebchuk LL.M. '80 S.J.D. 84, HLS Senior Fellow and Tel-Aviv University Professor Alma Cohen, and Harvard Business School Professor Charles Wang.
Bebchuk, Cohen, and Wang received the award for their study, "Learning and the Disappearing Association between Governance and Returns," (PDF) which was published last month by the Journal of Financial Economics.
The study seeks to explain a pattern that has received a great deal of attention from financial economists and capital market participants: During the period 1991-1999, stock returns were correlated with the G-Index, which is based on twenty-four governance provisions (Gompers, Ishii, and Metrick (2003)), and the E-Index, which is based on the six provisions that matter most (Bebchuk, Cohen, and Ferrell (2009)). The study shows that this correlation did not persist during the subsequent period 2000-2008. Furthermore, the study provides 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.
A blog post describes in detail the analysis of the paper.
The study is also available for download on SSRN. Last year, Bebchuk discussed the study further in a piece titled "Investing in Good Governance," written for the New York Times 'DealBook' column in September 2012.
Bebchuk is director of the Shareholder Rights Project, a clinical program that assists public pension funds and charitable organizations in improving corporate governance at publicly traded companies. He was appointed William J. Friedman and Alicia Townsend Friedman Professor of Law, Economics, and Finance in 1998, and has been director of the Program on Corporate Governance at HLS since 2003.
Cohen is senior research fellow at the John M. Olin Center for Law, Economics, and Business, senior lecturer at the Tel-Aviv University Department of Economics, and a faculty research fellow at the National Bureau of Economic Research. She was the William K. Jacobs Visiting Professor of Law and Economics at HLS from 2009 to 2011.
Wang is an assistant professor of business administration in the Accounting and Management Unit and teaches the Financial Reporting and Control course in the MBA required curriculum. Professor Wang is a former lecturer in law and economics at Harvard Law School and a past fellow in its Olin Program on Corporate Governance.