Corporate governance, market conditions and investors' reaction to information signals

We examine and compare the extent to which the reaction of investors to earnings announcements is influenced by a firm's governance profile and prevailing market conditions. We find that firms with better governance characteristics experience a larger initial reaction to both good and bad earni...

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Bibliographic Details
Published inAustralian journal of management Vol. 48; no. 1; pp. 38 - 66
Main Authors Nawaf Almaskati, Ron Bird, Danny Yeung, Yue Lu
Format Journal Article
Published 01.02.2023
Subjects
Corporate governance
Corporation law
Earnings management
Information measurement
Information services
Investments
Quality control
AUSTRALIA
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Summary:We examine and compare the extent to which the reaction of investors to earnings announcements is influenced by a firm's governance profile and prevailing market conditions. 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. We demonstrate that changes in market uncertainty and/or investor sentiment are related to the post-earnings announcement drift. We also find that a major channel through which greater corporate governance influences the market response to unexpected earnings news is by lowering information uncertainty and so providing greater clarity of the implication of the news for firm value. Finally, we establish that two types of uncertainties (market and information) have very different influence on investor's response to information signals.
Bibliography:AUSTRALIAN JOURNAL OF MANAGEMENT, Vol. 48, No. 1, Feb 2023, 38-66
Informit, Melbourne (Vic)
ISSN:0312-8962
DOI:10.1177/0312896221096492