The Vote is Cast: The Effect of Corporate Governance on Shareholder Value
London School of Economics & Political Science (LSE) - Financial Markets Group; Universitat Pompeu Fabra - Faculty of Economic and Business Sciences; Universitat Pompeu Fabra - Research Centre in Financial Economics and Accounting (CREFC)
The University of Pennsylvania; IESE Business School of the University of Navarra
INSEAD - Economics and Political Sciences; Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA)
February 17, 2010
This paper investigates whether improvements in the firm's internal corporate governance create value for shareholders. We analyze the market reaction to governance proposals that pass or fail by a small margin of votes in annual meetings. This provides a clean causal estimate that deals with the endogeneity of internal governance rules. We find that passing a proposal leads to significant positive abnormal returns. Adopting one governance proposal increases shareholder value by 2.8%. The market reaction is larger in firms with more antitakeover provisions, higher institutional ownership, stronger investor activism, and for proposals sponsored by institutions. In addition, we find that acquisitions and capital expenditures decline and long-term performance improves.
Number of Pages in PDF File: 50
Keywords: Agency Cost, Corporate Governance, Shareholder Meetings, Regression Discontinuity, Event Studies
JEL Classification: G34, D21, G14
Date posted: February 23, 2010 ; Last revised: February 24, 2012
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