The Effect of Corporate Governance on Shareholder Value

Repealing anti-takeover provisions...leads to lower investments [and] fewer acquisitions.

In The Vote is Cast: the Effect of Corporate Governance on Shareholder Value (NBER Working Paper No. 16574), authors Vicente Cunat, Mireia Gine, and Maria Guadalupe present evidence on how corporate governance provisions affect the firm's market value and its long-term performance. They quantify the effect of a governance vote by studying the outcomes of votes on governance proposals in shareholder meetings. Because proposals that fall around the majority vote threshold are expected to be the most uncertain, so that investors could not have predicted perfectly whether they would pass, these proposals enable the authors to observe a market price reaction to the passage or failure of such proposals.

They find that, on average, the market reacts to the passage of a governance-related shareholder proposal with positive abnormal returns of around 1.3 percent on the day of the vote. This reflects both an expected value that takes account of the probability that the proposal itself will be implemented and the dynamic effect of passing one proposal on the probability that more such proposals will be submitted and implemented in the future. The actual implied increase in market value of implementing a single proposal is about 2.8 percent. The effect on market value is more pronounced among firms with concentrated ownership, high pre-existing anti-takeover provisions, and high R and D expenditures.

Firm behavior also changes with the new governance structure. Repealing anti-takeover provisions, for example, leads to lower investments, fewer acquisitions, and an improvement in long-term performance after two or three years. The effect on the return on equity, however, is modest.

These results indicate that the market rewards changes in the internal corporate governance in targeted firms. This suggests that there are costs to the misalignment of incentives between owners and managers in modern corporations. These results also imply that shareholder activism may create value, and that improving democracy within firms might be value increasing

-- Lester Picker