Stock Price Informativeness and Corporate Governance: An International Study

Abstract

This study investigates the cross-country relationship between firm-level corporate governance and stock price informativeness. Using firm-level data from 22 developed countries, we find that stock price informativeness, as measured by firm-specific stock return variation and future earnings response coefficients, increases with the quality of a firm's corporate governance. Further analyses show that all mechanisms except board-related governance relate positively to stock price informativeness. Finally, firm-level corporate governance plays a more significant role in strengthening the stock return-earnings associations for firms in countries with strong institutional environments. This evidence highlights the role of country-level legal investor protections in shaping the relationship between firm-level corporate governance and stock price informativeness. © International Review of Finance Ltd. 2011.