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http://ssrn.com/abstract=412140
 
 

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Governance Mechanisms and Equity Prices


Martijn Cremers


University of Notre Dame

Vinay B. Nair


University of Pennsylvania - Finance Department

August 2003

Yale ICF Working Paper No. 03-15; NYU, Ctr for Law and Business Research Paper No. 03-09; AFA 2004 San Diego Meetings

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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Date posted: September 18, 2003  

Suggested Citation

Cremers, Martijn and Nair, Vinay B., Governance Mechanisms and Equity Prices (August 2003). Yale ICF Working Paper No. 03-15; NYU, Ctr for Law and Business Research Paper No. 03-09; AFA 2004 San Diego Meetings. Available at SSRN: http://ssrn.com/abstract=412140

Contact Information

K. J. Martijn Cremers (Contact Author)
University of Notre Dame ( email )
P.O. Box 399
Notre Dame, IN 46556-0399
United States
Vinay B. Nair
University of Pennsylvania - Finance Department ( email )
The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-746-0004 (Phone)
215-898-6200 (Fax)
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