Corporate Governance, Information Uncertainty and Market Reaction to Information Signals

Nawaf Almaskati (), Ron Bird, Yue Lu () and Danny Leung ()
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Nawaf Almaskati: University of Waikato
Yue Lu: University of Waikato
Danny Leung: University of Technology Sydney
Authors registered in the RePEc Author Service: Danny Yeung ()

Working Papers in Economics from University of Waikato

Abstract: We examine whether the reaction of investors to earnings announcements is influenced by a firm’s governance profile. We find that firms with better governance characteristics experience a larger initial reaction to both good and bad earnings announcements regardless of the prevailing sentiment and uncertainty conditions. However, the influence of governance is constrained to the announcement period and becomes insignificant during the post-announcement period. In contrast, we demonstrate that changes in market uncertainty and/or investor sentiment are related to the post earnings announcement drift suggesting that investors only return to reconsider their initial reaction to an announcement when there is a change in the conditions that influenced their reaction in the first place. We find that the major channel through which greater corporate governance influences the market response to unexpected earnings news is via lowering information uncertainty and so increasing the credibility of the information provided. Finally, we establish that the two types of uncertainty (market and information) analysed in this paper have very different influence on investor response to information signals.

Keywords: corporate governance; uncertainty; sentiment; information uncertainty; post-earnings-announcement-drift; information signals (search for similar items in EconPapers)
JEL-codes: D81 G10 G14 G30 G32 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2019-07-31
New Economics Papers: this item is included in nep-cfn
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