We test the empirical validity of a claim that has been playing a central role in debates on corporate governance—the claim that interventions by adivist hedge funds have a detrimental effect on the ...long-term interests of companies and their shareholders. We subject this claim to a comprehensive empirical investigation, examining a longfive-year window following activist interventions, and we find that the claim is not supported by the data. We find no evidence that activist interventions, including the investment-limiting and adversarial interventions that are most resisted and criticized, are followed by short-term gains in performance that come at the expense of long-term performance. We also find no evidence that the initial positive stock-price spike accompanying activist interventions tends to be followed by negative abnormal returns in the long term; to the contrary, the evidence is consistent with the initial spike reflecting correctly the intervention's long-term consequences. Similarly, we find no evidence for pump-and-dump patterns in which the exit of an activist is followed by abnormal long-term negative returns. Our findings have significant implications for ongoing policy debates.Policymakers and institutional investors should not accept the validity of the assertions that activist interventions are costly to firms and their shareholders in the long term; such claims do not provide a valid basis for limiting the rights, powers, and involvement of shareholders.
What Matters in Corporate Governance? Bebchuk, Lucian; Cohen, Alma; Ferrell, Allen
The Review of financial studies,
02/2009, Letnik:
22, Številka:
2
Journal Article
Recenzirano
Odprti dostop
We investigate the relative importance of the twenty-four provisions followed by the Investor Responsibility Research Center (IRRC) and included in the Gompers, Ishii, and Metrick governance index ...(Gompers, Ishii, and Metrick 2003). We put forward an entrenchment index based on six provisions: staggered boards, limits to shareholder bylaw amendments, poison pills, golden parachutes, and supermajority requirements for mergers and charter amendments. We find that increases in the index level are monotonically associated with economically significant reductions in firm valuation as well as large negative abnormal returns during the 1990-2003 period. The other eighteen IRRC provisions not in our entrenchment index were uncorrelated with either reduced firm valuation or negative abnormal returns.
This paper introduces a new hand-collected data set that tracks restrictions on shareholder rights at approximately 1,000 firms from 1978 to 1989. In conjunction with the 1990 to 2006 IRRC data, we ...track shareholder rights over 30 years. Most governance changes occurred during the 1980s. We find a robustly negative association between restrictions on shareholder rights (using G-Index as a proxy) and Tobin's Q.The negative association only appears after judicial approval of antitakeover defenses in the 1985 landmark Delaware Supreme Court decision of Moran v. Household. This decision was an unanticipated exogenous shock that increased the importance of shareholder rights.
Using a unique data set, I study how stock markets react to positive and negative events concerned with a firm׳s corporate social responsibility (CSR). I show that investors respond strongly ...negatively to negative events and weakly negatively to positive events. I then show that investors do value “offsetting CSR,” that is positive CSR news concerning firms with a history of poor stakeholder relations. In contrast, investors respond negatively to positive CSR news which is more likely to result from agency problems. Finally, I provide evidence that CSR news with stronger legal and economic information content generates a more pronounced investor reaction.
While overseas acquisitions by emerging-economy firms are gaining increased attention from the business press, our understanding of whether and why this inorganic mode of international expansion ...creates value to acquirer firms is limited. We argue that international acquisitions facilitate internalization of tangible and intangible resources that are both difficult to trade through market transactions and take time to develop internally, thus constituting an important strategic lever of value creation for emerging-economy firms. Furthermore, the magnitude of value created will be higher when the target firms are located in advanced economic and institutional environments: country markets that carry the promise of higher quality of resources, and therefore, stronger complementarity to the existing capabilities of emergingeconomy firms. An event study of 425 cross-border acquisitions by Indian firms during 2000-2007 supports our predictions.
We provide a new rationale for pyramidal ownership in family business groups. A pyramid allows a family to access all retained earnings of a firm it already controls to set up a new firm, and to ...share the new firm's nondiverted payoff with share-holders of the original firm. Our model is consistent with recent evidence of a small separation between ownership and control in some pyramids, and can differentiate between pyramids and dual-class shares, even when either method can achieve the same deviation from one share-one vote. Other predictions of the model are consistent with both systematic and anecdotal evidence.
We investigate how state capacity—the administrative ability to formulate and implement policy—affects the institutional adoption of new policies and the decoupling of those policies from their ...original purpose in the face of pressures from professions, multilateral agencies, and imitation among countries. We expect state capacity to reduce the effect of professional and imitation influences, to increase the impact of coercive effects by multilateral agencies, and to lessen decoupling between policies' adoption and desired outcomes. We tested these predictions using a unique longitudinal dataset on the adoption of minority shareholders' legal protections and the development of the stock market in 78 countries between 1970 and 2011. We found evidence consistent with the moderating effects of state capacity on institutional adoption and on lessening policy–practice decoupling. Our findings suggest that the strength of state capacity influences which policy models policymakers select and adopt, whether they implement them effectively, and what the consequences of such adoption are.
Although research has examined the social media-shareholder value link, the role of consumer mindset metrics in this relationship remains unexplored. To this end, drawing on the elaboration ...likelihood model and accessibility/diagnosticity perspective, the authors hypothesize varying effects of owned and earned social media (OSM and ESM) on brand awareness, purchase intent, and customer satisfaction and link these consumer mindset metrics to shareholder value (abnormal returns and idiosyncratic risk). Analyzing daily data for 45 brands in 21 sectors using vector autoregression models, they find that brand fan following improves all three mindset metrics. ESM engagement volume affects brand awareness and purchase intent but not customer satisfaction, while ESM positive and negative valence have the largest effects on customer satisfaction. OSM increases brand awareness and customer satisfaction but not purchase intent, highlighting a nonlinear effect of OSM. Interestingly, OSM is more likely to increase purchase intent for high involvement utilitarian brands and for brands with higher reputation, implying that running a socially responsible business lends more credibility to OSM. Finally, purchase intent and customer satisfaction positively affect shareholder value.
This Article offers a novel theory of corporate control. It does so by shedding new light on corporate-ownership structures and challenging the prevailing model of controlling shareholders as ...essentially opportunistic actors who seek to reap private benefits at the expense of minority shareholders. Our core claim is that entrepreneurs value corporate control because it allows them to pursue their vision (i.e., any business strategy that the entrepreneur genuinely believes will produce an above-market rate of return) in the manner they see fit. We call the subjective value an entrepreneur attaches to her vision the entrepreneur's idiosyncratic vision. Our framework identifies a fundamental tradeoff, stemming from asymmetric information and differences of opinion, between the entrepreneur's pursuit of her idiosyncratic vision and investors' need for protection against agency costs. Entrepreneurs and investors address this inevitable conflict through different ownership structures, each with different allocations of control and cash-flow rights. Concentrated ownership, therefore, should not be viewed as an unalloyed evil. To the contrary, it creates value for controlling and minority shareholders alike. Our analysis shows that controlling shareholders hold a control block to increase the pie's size (pursue idiosyncratic vision) rather than to dictate the pie's distribution (consume private benefits). Importantly, when the entrepreneur's idiosyncratic vision is ultimately realized, the benefits will be distributed pro rata to all investors. Our framework provides important insights for investor protection and corporate law doctrine and policy. We argue that corporate law for publicly traded firms with controlling shareholders should balance the controller's need to secure her idiosyncratic vision against the minority's need for protection. While the existing corporate-law scholarship has focused solely on the protection of minority shareholders, we show that it is equally important to pay heed to the rights of the controlling shareholders.
Using new data for the universe of firms covered in Amadeus, we reconstruct the portfolios of shareholders who hold equity stakes in private- and publicly traded European firms. We find great ...heterogeneity in the degree of portfolio diversification across large shareholders. Exploiting this heterogeneity, we document that firms controlled by diversified large shareholders undertake riskier investments than firms controlled by nondiversified large shareholders. The impact of large shareholder diversification on corporate risk-taking is both economically and statistically significant. Our results have important implications at the policy level because they identify one channel through which policy changes can improve economic welfare.
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