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

ABSTRACT

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.

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