Governance Through Trading on Acquisitions of Public Firms

We identify an important channel, acquisitions of public targets, via which the governance through trading (GTT) improves firm values. The disciplinary effect of GTT is more pronounced for firms with higher managerial wealth-performance sensitivity and moderate institutional ownership concentration. Firms with higher GTT also have higher subsequent ROA, ROE, Tobin's Q, analysts forecasted EPS growth rate, and lower expected default risk. The effect is stronger after Decimalization and robust to using two instrumental variables. We conduct several exercises to rule out alternative explanations, such as institutional superior information, investor activism, and momentum. Additional tests show that the disciplinary effect of GTT only exists for less financially-constrained firms and non-all-cash M&As where the agency problem is more likely to be prevalent.

Keywords: governance through trading, corporate investments, mergers and acquisitions, wealth performance sensitivity, Decimalization

JEL Classification: G20, G30, G32

Suggested Citation: Suggested Citation

Chang, Eric Chieh C. and Lin, Tse-Chun and Ma, Xiaorong, Governance Through Trading on Acquisitions of Public Firms (October 17, 2020). WFA 2013 Lake Tahoe Meetings Paper, Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2263837 or http://dx.doi.org/10.2139/ssrn.2263837