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Governance Mechanisms and Equity Prices

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  • K. J. MARTIJN CREMERS
  • VINAY B. NAIR

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% to 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. The complementarity effect exists for firms with lower industry-adjusted leverage and is stronger for smaller firms. Copyright 2005 by The American Finance Association.

Suggested Citation

  • K. J. Martijn Cremers & Vinay B. Nair, 2005. "Governance Mechanisms and Equity Prices," Journal of Finance, American Finance Association, vol. 60(6), pages 2859-2894, December.
  • Handle: RePEc:bla:jfinan:v:60:y:2005:i:6:p:2859-2894
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