Governance Mechanisms and Equity Prices

Posted: 20 Oct 2006

See all articles by Martijn Cremers

Martijn Cremers

University of Notre Dame

Vinay B. Nair

University of Pennsylvania - Finance Department

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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.

Keywords: corporate governance, shareholder control, shareholder activism

Suggested Citation

Cremers, K. J. Martijn and Nair, Vinay B., Governance Mechanisms and Equity Prices. Journal of Finance, Vol. 60, No. 6, pp. 2859-2894, 2005. Available at SSRN:

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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