Governance Mechanisms and Equity Prices
University of Notre Dame
Vinay B. Nair
University of Pennsylvania - Finance Department
Yale ICF Working Paper No. 03-15; NYU, Ctr for Law and Business Research Paper No. 03-09; AFA 2004 San Diego Meetings
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.
Number of Pages in PDF File: 62
Date posted: September 18, 2003