Governance Through Trading on Acquisitions of Public Firms

WFA 2013 Lake Tahoe Meetings Paper

Journal of Corporate Finance, Forthcoming

53 Pages Posted: 12 May 2013 Last revised: 17 Oct 2020

See all articles by Eric C. Chang

Eric C. Chang

University of Hong Kong - School of Business

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics

Xiaorong Ma

University of Macau, Faculty of Business Administration

Date Written: October 17, 2020

Abstract

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

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

Eric Chieh C. Chang

University of Hong Kong - School of Business ( email )

Meng Wah Complex
Pokfulam Road
Hong Kong
China

Tse-Chun Lin (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Xiaorong Ma

University of Macau, Faculty of Business Administration ( email )

Macau

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
216
Abstract Views
1,673
rank
183,301
PlumX Metrics