Governance Mechanisms and Equity Prices
AbstractWe 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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Bibliographic InfoPaper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm376.
Date of creation: 18 Sep 2003
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-07-18 (All new papers)
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