Premium
Governance Mechanisms and Equity Prices
Author(s) -
CREMERS K. J. MARTIJN,
NAIR VINAY B.
Publication year - 2005
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2005.00819.x
Subject(s) - corporate governance , business , market for corporate control , shareholder , portfolio , leverage (statistics) , equity (law) , vulnerability (computing) , complementarity (molecular biology) , monetary economics , financial system , finance , economics , genetics , computer security , machine learning , biology , computer science , political science , law
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.