Investor rights

Research

• Shareholder rights are correlated with long-term stock returns

  Gompers, Ishii, and Metrick (2003): “Corporate Governance and Equity Prices”
  Quarterly Journal of Economics

  • Studies the effect of policies to reduce shareholder rights such as staggered board, golden parachutes and poison pills
  • Firms with high shareholder rights delivered 8.5%/year higher stock returns than firms with low shareholder rights in the 1990's
  • Firms with higher shareholder rights also had higher firm value, higher profits, higher sales growth, lower capital expenditures, and made fewer acquisitions
• Any correlation between shareholder rights and stock returns may not be causal

  Core, Guay, and Rusticus (2006): “Does Weak Governance Cause Weak Stock Returns? An Examination of Firm Operating Performance and Investors' Expectations”
  Journal of Finance

  • Firms with high shareholder rights earn high profits – but these high profits were already predicted by the market
  • So their higher stock returns are unlikely due to them being more profitable. It may be because they are riskier
• Why the link between shareholder rights and stock returns disappeared in the 2000's

  Bebchuk, Cohen, and Wang (2014): “Learning and the Disappearing Association Between Governance and Returns”
  Journal of Financial Economics

  • Firms with shareholder rights delivered higher stock returns in the 1990's, but not in the 2000's
  • This is not because shareholder rights became irrelevant, but instead because the market started to price in the value of shareholder rights
  • Firms with high shareholder rights earned higher profits in both the 1990's and the 2000's. These higher profits were not predicted by the market in the 1990's, but were in the 2000's
• How competition affects the link between shareholder rights and stock returns

  Giroud and Mueller (2011): “Corporate Governance, Product Market Competition, and Equity Prices”
  Journal of Finance

  • Shareholder rights matter only in non-competitive industries
  • In non-competitive industries, firms with low shareholder rights suffer lower stock returns, profitability, firm value and labour productivity. They also make more value-destroying actions and have higher input costs

• The effect of dual class shares on firm value

  Gompers, Paul A., Joy Ishii, and Andrew Metrick (2009): “Extreme Governance: An Analysis of Dual-Class Firms In the United States”
  Review of Financial Studies

  • Dual class shares are associated with lower firm value
• How dual class shares reduce firm value

  Masulis, Wang, and Xie (2009): “Agency Problems At Dual-Class Companies” 
  Journal of Finance

  • Dual-class shares are associated with higher CEO pay, worse acquisitions, and worse investment decisions
• Shareholder proposals to improve governance increase firm value

  Cunat, Gine, and Guadalupe (2012): “The Vote Is Cast: The Effect of Corporate Governance On Shareholder Value”
  Journal of Finance

  • When shareholders pass resolutions to improve governance (e.g. by removing antitakeover provisions), shareholder value increases by 2.8%
  • Long-term performance also improves, acquisitions and capital expenditures fall
• Laws to improve governance increase firm value

  Cohn, Gillan, and Hartzell (2013): “On Enhancing Shareholder Control: A (Dodd-) Frank Assessment of Proxy Access”
  Journal of Finance

  • The SEC Dodd-Frank proxy access rule (struck down by the Court of Appeals) would have allowed investors to nominate their own directors
  • It increased stock returns, particularly for firms that are performing poorly, have shareholders likely to exercise control, and where acquiring a stake is relatively expensive
  • The increase is lower if shareholders are likely to deviate from value maximisation, e.g. are aligned with labour or union interests
• Takeover defences increase value in firms with key business relationships

  Johnson, Karpoff, and Yi (2015): “The Bonding Hypothesis of Takeover Defences: Evidence from IPO Firms”
  Journal of Financial Economics

  • Hypothesis that takeover defences may help protect a company’s business relationships from hostile takeovers after it goes public
  • Takeover defences are associated with higher going-public valuations, if and only if a company has a large customer, dependent supplier, or strategic alliance