Corporate governance and firm value at dual class firms

This study explores whether corporate governance at dual class firms differs from that of their single class counterparts and whether firm value at dual class firms is associated with governance. Employing a sample of 1309 U.S. dual class firm‐year observations for the period 1996–2006, we show evidence that dual class firms are more likely to employ more shareholder rights provisions while exhibiting lower board and board committee independence than single class firms. The results also show that shareholder rights increase while board provisions decrease in wedge at dual class firms. Further findings underscore that firm value at dual class firms decreases in wedge, and increases in shareholder rights and in board‐related provisions, particularly in director independence. While strong board‐related governance at dual class firms is significantly positively related to firm value in a multivariate setting, shareholder rights are significantly associated with firm value only in instances of the weakest board provisions. Following unification, firms employ more antitakeover provisions while strengthening their board and board committee independence.     

Corporate Governance and Acquirer Returns

We examine whether corporate governance mechanisms, especially the market for corporate control, affect the profitability of firm acquisitions. We find that acquirers with more antitakeover provisions experience significantly lower announcement‐period abnormal stock returns. This supports the hypothesis that managers at firms protected by more antitakeover provisions are less subject to the disciplinary power of the market for corporate control and thus are more likely to indulge in empire‐building acquisitions that destroy shareholder value. We also find that acquirers operating in more competitive industries or separating the positions of CEO and chairman of the board experience higher abnormal announcement returns.     

Corporate Governance and Value: Evidence from “Close Calls” On Shareholder Governance Proposals

The authors summarize the findings of their recent study of the effects of specific corporate governance provisions on firm value. Using a sample of governance provisions that were subjected to shareholder votes during the period 1997–2011, this study analyzes cases in which shareholder‐sponsored corporate governance proposals were either rejected or passed by a small margin (no more than 5% of the vote). By so doing, this study helps correct two limitations of the existing governance literature: (1) that the effects of expected governance changes are already incorporated in share prices (the “expectations” problem); and (2) that governance policies are often a consequence rather than a cause of other variables such as corporate performance and are thus correlated with many other firm characteristics (the “endogeneity” problem). The authors' findings show that expected improvements in corporate governance through the adoption of particular corporate governance provisions—particularly the removal of anti‐takeover provisions—is associated with both positive abnormal stock returns and improvements in long‐term firm operating performance. The authors estimate that the adoption of such governance proposals increases shareholder value by 2.6%, on average. Moreover, these returns are consistent with, and thus accurate predictors of, future changes in corporate investment (reductions of capital spending, in most cases) and improvements in operating performance.     

Underwriting Fees and Shareholder Rights

Do firms’ governance provisions affect their terms of obtaining external financing? We hypothesize that it is more difficult for firms with more restrictions on shareholder rights to raise external equity, and that since analyst coverage is an important part of underwriting services, underwriters would use analyst recommendations to promote issuing firms with weaker shareholder rights more strongly and charge them higher underwriting fees. Consistent with our hypothesis, we find that analyst recommendations on issuing firms with weak shareholder rights increase more than those with strong shareholder rights prior to SEOs, and that underwriting spreads are positively related to issuing firms’ shareholder rights as proxied by the G‐index. Furthermore, the effect of shareholder rights on underwriting fees is largely contained in the six provisions in the E‐index.     

Do analyst recommendations reflect shareholder rights?

We examine whether sell-side analyst recommendations reflect shareholder rights. Our rationale is that analysts should be influenced by external governance only if market participants do not efficiently price its value. We find that stronger shareholder rights are associated with more favorable recommendations. Further analysis reveals that analysts favor firms with strong shareholder rights only when strong rights appear to be warranted, but do not penalize firms for having strong rights when not needed. These findings occupy middle ground in the debate on the pricing efficiency of shareholder rights. Moreover, we find that firm value is positively associated with the strength of shareholder rights regardless of the expected external governance structure. The latter result is consistent with a “one-size-fits-all” interpretation, and implies that firms across the board could increase share value by reducing their number of anti-takeover provisions.     

Corporate Governance,Product Market Competition,and the Wealth Effect of R&D Spending Changes

This article examines whether corporate governance and product market competition interact to affect the profitability of corporate research and development (R&D) investments. Firms announcing R&D spending changes experience positive and significant wealth effects, and these effects are mainly driven by good‐governance firms. Investors appear to view announcements of R&D spending changes undertaken by firms with stronger shareholder rights as evidence of value creation. Moreover, the favorable wealth effects are stronger for good‐governance firms in noncompetitive industries than in competitive industries, supporting the argument that good governance substitutes for product market competition.     

Product Market Competition and Shareholder Rights: International Evidence

This paper examines the interaction between product market competition and international differences in shareholder rights in relation to firm performance and corporate policies. In contrast to existing literature, we provide evidence of complementarities between product market competition and country shareholder rights protections. The benefits of shareholder rights protections for firm performance are conditional on the presence of a competitive industry environment. We find that stronger shareholder rights protections are associated with better firm performance in competitive industries. However, this relation is not significant in concentrated industries. Consistent results are obtained from the analysis of key corporate policies.     

The Vote Is Cast: The Effect of Corporate Governance on Shareholder Value

This paper investigates whether improvements in the firm's internal corporate governance create value for shareholders. We analyze the market reaction to governance proposals that pass or fail by a small margin of votes in annual meetings. This provides a clean causal estimate that deals with the endogeneity of internal governance rules. We find that passing a proposal leads to significant positive abnormal returns. Adopting one governance proposal increases shareholder value by 2.8%. The market reaction is larger in firms with more antitakeover provisions, higher institutional ownership, and stronger investor activism for proposals sponsored by institutions. In addition, we find that acquisitions and capital expenditures decline and long‐term performance improves.     

Spin‐offs: Tackling the Conglomerate Discount

Spin‐offs and other restructuring actions have risen sharply in 2011, driven by the need to streamline business models and increase corporate values. These transactions can be an effective tool for addressing the conglomerate valuation discount that has been a pervasive phenomenon over the past decade, affecting conglomerates in most regions across the world. In particular, North American and Western European conglomerates trade at valuation multiples that are roughly 10% lower than those of their pure‐play peers. A conglomerate discount also prevails in some of the emerging markets, including CEEMEA and Asia. Nevertheless, in some regions, notably Japan and Latin America, conglomerates typically trade at a premium. Although the average conglomerate discount narrowed during the financial crisis due to the perceived benefits of diversification during downturns, almost half of the conglomerates globally trade at a discount, and almost a third of all conglomerates have persistently traded at a discount during the past five years. For such companies, fixing the discount requires a simplification of the business model. The authors show that recent announcements of spin‐offs have led to significant share price outperformance by the parent company in both the short and the longterm, highlighting their effectiveness as a tool to enhance valuation. Spin‐offs can be particularly attractive for those conglomerates that operate unrelated business segments since these firms trade at a sharper discount than diversified firms operating in related businesses. The authors discuss how management should think about the financial implications of spin‐offs, including capital structure considerations, dividend policy, and turnover in the shareholder base.     

Corporate governance and firm cash holdings in the US

Using governance metrics based on antitakeover provisions and inside ownership, we find that firms with weaker corporate governance structures actually have smaller cash reserves. When distributing cash to shareholders, firms with weaker governance structures choose to repurchase instead of increasing dividends, avoiding future payout commitments. The combination of excess cash and weak shareholder rights leads to increases in capital expenditures and acquisitions. Firms with low shareholder rights and excess cash have lower profitability and valuations. However, there is only limited evidence that the presence of excess cash alters the overall relation between governance and profitability. In the US, weakly controlled managers choose to spend cash quickly on acquisitions and capital expenditures, rather than hoard it.     

The impact of corporate governance on corporate performance: Evidence from Japan

Employing a unique data set provided by Governance Metrics International, which rates firms using six different corporate governance dimensions, we analyze whether Japanese firms with many governance provisions have a better corporate performance than firms with few governance provisions. Employing an overall index, we find that well-governed firms significantly outperform poorly governed firms by up to 15% a year. Using indices for various governance categories, we find that not all categories affect corporate performance. Governance provisions that deal with financial disclosure, shareholder rights, and remuneration do affect stock price performance. The impact of provisions that deal with board accountability, market for control, and corporate behavior is limited.     

Disentangling the Incentive and Entrenchment Effects of Large Shareholdings

This article disentangles the incentive and entrenchment effects of large ownership. Using data for 1,301 publicly traded corporations in eight East Asian economies, we find that firm value increases with the cash-flow ownership of the largest shareholder, consistent with a positive incentive effect. But firm value falls when the control rights of the largest shareholder exceed its cash-flow ownership, consistent with an entrenchment effect. Given that concentrated corporate ownership is predominant in most countries, these findings have relevance for corporate governance across the world.     

Downstream Value of Upstream Finance

We examine market value implications of managing liquidity via supplier financing. Results suggest a direct link between shareholder wealth and use of trade credit, and the relation exhibits significant cross‐sectional variation. In particular, the market value of trade credit varies with the liquidity of goods sold and competition in product markets. Evidence also indicates the value‐supplier financing association strengthens with financial constraint, which supports the financing motive for trade credit. Further findings are consistent with the transaction cost motive. Overall, we conclude that shareholders value the strategic benefits associated with supplier financing and that downstream firms’ characteristics influence this value.     

Tradeoffs between Internal and External Governance: Evidence from Exogenous Regulatory Shocks

We use the 2002 NYSE and NASDAQ listing requirements mandating firms have a majority of independent directors on the board as an exogenous shock to examine the interaction between internal and external governance. Relative to compliant firms, noncompliant firms significantly reduced exposure to three external governance mechanisms: the market for corporate control, shareholder activism, and credit markets, by adding antitakeover provisions, adopting officer and director protection provisions, and reducing debt levels, respectively. The results are stronger in firms with greater exposure to the relevant external governance mechanism. The evidence suggests that firms treat internal and external governance as substitutes.     

Corporate governance practices,CEO characteristics and firm performance

This paper examines the link between firm performance, CEO characteristics and changes in corporate governance practices using an unbalanced panel of 1721 firms from 1980 to 1995. This paper provides the stylized facts about corporate governance practices and details how governance practices have evolved over time. By 1995, the majority of firms had implemented differing types of charter amendments, poison pills or other governance provisions that are potentially harmful to shareholders. Most firms have adopted multiple and even redundant governance provisions. Shareholders are more likely to approve an increase in the power of the boards of directors of better performing firms, while the boards of poorly performing firms are much more likely to initiate governance changes, such as poison pills, that circumvent shareholder approval. I find no relationship between CEO age, tenure or compensation and governance changes.     

The Impact of Go‐Shop Provisions in Merger Agreements

We examine whether go‐shop provisions in merger agreements are used to benefit target shareholders or for agency/entrenchment reasons. We find that go‐shop provisions are more likely in deals involving the negotiation selling method, financial buyers and all cash financing, and in targets with less valuation uncertainty. We confirm that go‐shops have a positive association with the initial offer premium. Results suggest that deals with go‐shop provisions are more likely to have a competing bid and an upward revision of the initial offer premium. Collectively, our results indicate that go‐shops are effective contractual devices used to further target shareholder interests.     

Costs of voting and firm performance: Evidence from RegTech adoption in Chinese listed firms

Employing the 2014 mandatory adoption of online shareholder voting in China, we show that the reduction of voting costs through online voting is positively related to participation in shareholder meetings and future firm performance. Our mechanism analysis suggests that the improved firm performance is mainly driven by the enhanced governance role played by informed investors and institutional investors. Further analysis shows that online shareholder voting makes the firms more attractive to mutual fund managers who are far away from the firms. Moreover, we find that the improved firm performance is concentrated in firms with low controlling shareholder ownership, and that online shareholder voting is associated with an increased likelihood of vetoing proposals and lower tunneling.     

Vote Trading and Information Aggregation

The standard analysis of corporate governance assumes that shareholders vote in ratios that firms choose, such as one share‐one vote. However, if the cost of unbundling and trading votes is sufficiently low, then shareholders choose the ratios. We document an active market for votes within the U.S. equity loan market, where the average vote sells for zero. We hypothesize that asymmetric information motivates the vote trade and find support in the cross section. More trading occurs for higher‐spread and worse‐performing firms, especially when voting is close. Vote trading corresponds to support for shareholder proposals and opposition to management proposals.     

The consequences of limiting shareholder litigation: Evidence from exclusive forum provisions

In response to an explosion of shareholder litigation, many firms have adopted exclusive forum provisions which limit lawsuits to courts in a firm's state of incorporation. This paper examines the consequences of a required venue for shareholder litigation. Delaware-incorporated companies experience significant increases in firm value around exogenous events that confirmed the use of a specified forum. Reduced legal costs and the designation of the domicile court as the sole forum to hear shareholder claims contribute to the increase in firm value. Overall, these findings suggest that a required venue for shareholder litigation benefits firms by eliminating multi-jurisdictional lawsuits and reducing the threat of claims with little merit.     

Shareholder access to manager‐biased courts and the monitoring/litigation trade‐off

Facilitating access to courts for outside shareholders is often viewed as a remedy against managerial opportunism. My model shows that, when courts are biased toward managers, reducing the barriers to shareholder suits can lower efficiency because it can lead to either excessive litigation or excessive monitoring of managers by shareholders. The latter effect implies that easy shareholder litigation may lead to a greater use of substitute mechanisms of corporate governance rather than more reliance on the judiciary. I also show that easy shareholder access to manager‐biased courts leads to the formation of more, rather than less, concentrated ownership structures.