Governance Mechanisms and Equity Prices




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    • K. J. Martijn Cremers is from the International Center for Finance at the Yale School of Management. Vinay B. Nair is from the Wharton School at the University of Pennsylvania. The authors thank William T. Allen, Arturo Bris, Stephen Brown, Judy Chevalier, Robert Daines, Robert Engle, Kose John, Yrjo Koskinen, Florencio Lopez-de-Silanes, Anthony Lynch, Andrew Metrick, Paul Mahoney, Eli Ofek, Lily Xiaoli Qiu, Ivo Welch, Robert Whitelaw, Daniel Wolfenzon, and Jeff Wurgler as well as seminar participants at Yale University, New York University, University of Amsterdam, Leuven University, Tilburg University, the European Finance Association Meetings at Glasgow, the American Finance Association Meetings at San Diego, and the Olin conference at the University of Virginia School of Law for comments and/or helpful discussions. We also thank Robert Stambaugh (the editor) and an anonymous referee for comments that improved the exposition of the paper. Nair thanks the Center for Law and Business at New York University for financial support.


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.