Shareholder Coordination and the Market for Corporate Control

Abstract

The ease of coordination among a firm's institutional shareholders has an important impact on the market for corporate control. I construct two measures to capture the ease of shareholder coordination, one based on the geographic proximity among institutional shareholders and the other based on the correlation in their portfolio allocation decisions. I find that target firms with greater ease of shareholder coordination experience significantly higher abnormal returns around the takeover announcement. In a similar vein, acquirer firms with greater ease of shareholder coordination are associated with higher acquisition announcement returns. Using the SEC's 1992 proxy reform as an exogenous shock that reduces barriers to shareholder coordination, I find that these effects become significantly stronger after the reform. These findings suggest that the ease of coordination among institutional shareholders plays an important role in the market for corporate control by enhancing the monitoring role of both target and acquirer shareholders and raising the bargaining power of target shareholders.

Keywords: Coordination; Institutional investors; Mergers and acquisitions; Shareholder monitoring; Proxy reform

JEL Classification: G23, G34