Governance Mechanisms and Equity Prices

Martijn Cremers · Vinay B. Nair

131 citations0/0 files storedRePEc: Research Papers in Economics

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Corporate Finance and Governance Financial Markets and Investment Strategies Auditing, Earnings Management, Governance

Abstract

We investigate how the market for corporate control (external governance) and shareholder activism (internal governance) interact. A portfolio that buys firms with the highest level of takeover vulnerability and shorts firms with the lowest level of takeover vulnerability generates an annualized abnormal return of 10 - 15% only when public pension fund (blockholder) ownership is high as well. A similar portfolio created to capture the importance of internal governance generates annualized abnormal returns of 8%, though only in the presence of high vulnerability to takeovers. Further, we show that the complementary relation exists for firms with lower industry-adjusted leverage and is stronger for smaller firms. The complementary relation is confirmed using accounting measures of profitability. Using data on acquisitions, firm level Q's and accounting performance, we explore possible interpretations, providing preliminary evidence for a risk effect as well.

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References

1993Common risk factors in the returns on stocks and bonds 1998Law and Finance 1997On Persistence in Mutual Fund Performance 1997A Survey of Corporate Governance 1973Risk, Return, and Equilibrium: Empirical Tests 1993Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency 1993The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems 1986Large Shareholders and Corporate Control

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