Shareholder Coordination, Corporate Governance, and Firm Value

Abstract

Ease of coordination can enable diffuse shareholders to play a more effective role in corporate governance and thereby increase firm value. Using geographical proximity and correlation in portfolio allocation decisions as proxies for the ease of coordination, I find evidence that ease of coordination among institutional shareholders is positively associated with firm value. To identify the effect of shareholder coordination on firm value, I exploit two plausibly exogenous shocks to shareholder coordination, namely mergers of asset management firms and the 1992 proxy reform. Difference-in-differences estimates show that ease of coordination increases firm value. I further show that an exogenous decrease in ease of shareholder coordination leads to fewer anti-takeover provisions being rescinded, overly excessive CEO compensation, lower equity-based pay for CEOs, and a lower likelihood of that a CEO is replaced following poor performance. Overall, these findings suggest that ease of coordination improves firm value by enhancing the governance role provided by shareholders.

Keywords: Coordination, institutional investors, corporate governance, firm value

JEL Classification: G23, G32, G34