Governance Mechanisms and Equity Prices
- Author(s): K. J. MARTIJN CREMERS, VINAY B. NAIR
- Published: Nov 10, 2005
- Pages: 2859-2894
- DOI: 10.1111/j.1540-6261.2005.00819.x
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% to 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. The complementarity effect exists for firms with lower industry‐adjusted leverage and is stronger for smaller firms.