A new Journal of Finance paper examines whether improvements in a company’s internal corporate governance create value for shareholders. In The Vote is Cast: The Effect of Corporate Governance on Shareholder Value Vicente Cuñat, Mireia Gine, and Maria Guadalupe analyze the market reaction to governance proposals that pass or fail by a small margin of votes in annual meetings to identify the impact of shareholder sponsored changes to governance rules on shareholder values and management behavior. Cuñat et al 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, stronger investor activism, and for proposals sponsored by institutions. In addition, we find that acquisitions and capital expenditures decline and long-term performance improves.
The authors also conclude that, besides establishing how much shareholder value is generated by increasing shareholder rights and improving corporate governance inside firms, shareholder activism can create significant value:
Improving democracy inside firms, so that shareholder proposals that fall short of the majority threshold pass, would be value-increasing. We are able to precisely quantify that value.
We find that institutional activists’ proposals have higher effects, with an abnormal return of 2.1% on the day of the vote and a further 2.2% over the following six days. For individual proponents, the cumulative effect after one week is just 1.1%, and it is not statistically different from zero.