Home Technology The Vote is Cast: The Effect of Corporate Governance on Shareholder Value

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

by: greenbackd

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.

Read the full paper here: The Vote is Cast: The Effect of Corporate Governance on Shareholder Value (February 17, 2010 version on SSRN)

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My name is Tobias Carlisle. I am the founder and managing member of Eyquem Investment Management LLC, and portfolio manager of Eyquem Fund LP. Eyquem Fund LP pursues a deep value, contrarian, Grahamite investment strategy based on the research featured in Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (hardcover, 288 pages, Wiley Finance, December 26, 2012), and discussed on Greenbackd. I have extensive experience in activist investment, company valuation, public company corporate governance, and mergers and acquisitions law. Prior to founding Eyquem, I was an analyst at an activist hedge fund, general counsel of a company listed on the Australian Stock Exchange, and a corporate advisory lawyer. As a lawyer specializing in mergers and acquisitions I have advised on transactions across a variety of industries in the United States, the United Kingdom, China, Australia, Singapore, Bermuda, Papua New Guinea, New Zealand, and Guam, ranging in value from $50 million to $2.5 billion. I am a graduate of the University of Queensland in Australia with degrees in law and business (management). Contact me I can be contacted at greenbackd [at] gmail [dot] com. I welcome all feedback. Connect on LinkedIn, where we’re Friends.

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