Governance Measures

Measures

Key: Measure - Build - Sources - Paper

Note: Each paper seems to use one of two indices, GIM or E index (from BCF) to measure corporate governance

• Corporate Governance (anti-takeover provision or ATP) Indices - Gompers et al 2003 (GIM) uses 24 IRRC antitakeover provisions & adds one point to index for each provision that enhances managerial power. Bebchuk et al 2009 (BCF) takes only 6 of those provisions for its entrenchment index (staggered boards, limits to shareholder bylaw amendments, limits to shareholder charter amendments, supermajority requirements for mergers, poison pills, and golden parachutes - SDC M&A Database, acquirer has financial info thru Compustat and CRSP Daily Stock Price & Returns File, acquirer is included in Investor Responsibility Research Center (IRRC) of antitakeover provisions - Masulis et al 2011
• GIM Difference - Target GIM index less Bidder GIM index - IRRC, SDC, Compustat, CRSP - Wang et al 2009

Papers

PDF copies of all papers found under the following directory:

• E:\McNair\Projects\Winner's Curse\Papers

Masulis et al 2011

@article{masulis2007corporate,
 title={Corporate governance and acquirer returns},
 author={Masulis, Ronald W and Wang, Cong and Xie, Fei},
 journal={The Journal of Finance},
 volume={62},
 number={4},
 pages={1851--1889},
 year={2007},
 publisher={Wiley Online Library},
 abstract={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.}
}

Bebchuk et al 2009

@article{bebchuk2009matters,
 title={What matters in corporate governance?},
 author={Bebchuk, Lucian and Cohen, Alma and Ferrell, Allen},
 journal={Review of Financial studies},
 volume={22},
 number={2},
 pages={783--827},
 year={2009},
 publisher={Soc Financial Studies}
 abstract={We investigate the relative importance of the twenty-four provisions followed by the Investor Responsibility Research Center (IRRC) and included in the Gompers, Ishii, and Metrick governance index (Gompers, Ishii, and Metrick 2003). We put forward an entrenchment index based on six provisions: staggered boards, limits to shareholder bylaw amendments, poison pills, golden parachutes, and supermajority requirements for mergers and charter amendments. We find that increases in the index level are monotonically associated with economically significant reductions in firm valuation as well as large negative abnormal returns during the 1990–2003 period. The other eighteen IRRC provisions not in our entrenchment index were uncorrelated with either reduced firm valuation or negative abnormal returns.}
}

Wang et al 2009

@article{wang2009corporate,
 title={Corporate governance transfer and synergistic gains from mergers and acquisitions},
 author={Wang, Cong and Xie, Fei},
 journal={Review of Financial Studies},
 volume={22},
 number={2},
 pages={829--858},
 year={2009},
 publisher={Soc Financial Studies}
 abstract={We present evidence on the benefits of changes in control from mergers and acquisitions. We find that the stronger the acquirer's shareholder rights relative to the target's, the higher the synergy created by an acquisition. This result supports the hypothesis that acquisitions of firms with poor corporate governance by firms with good corporate governance generate higher total gains. We also find that the synergy effect of corporate governance is shared by target shareholders and acquiring shareholders, in that both target returns and acquirer returns increase with the shareholder-rights difference between the acquirer and the target.}
}

Moeller et al 2007

@article{moeller2007diversity,
 title={How do diversity of opinion and information asymmetry affect acquirer returns?},
 author={Moeller, Sara B and Schlingemann, Frederik P and Stulz, Ren{\'e} M},
 journal={Review of Financial Studies},
 volume={20},
 number={6},
 pages={2047--2078},
 year={2007},
 publisher={Soc Financial Studies},
 abstract={We examine the theoretical predictions that link acquirer returns to diversity of
opinion and information asymmetry. Theory suggests that acquirer abnormal returns
should be negatively related to information asymmetry and diversity-of-opinion
proxies for equity offers but not cash offers. We find that this is the case and that,
more strikingly, there is no difference in abnormal returns between cash offers for
public firms, equity offers for public firms, and equity offers for private firms after
controlling for one of these proxies, idiosyncratic volatility.}
}

Bhagat & Bolton 2008

@article{bhagat2008corporate,
 title={Corporate governance and firm performance},
 author={Bhagat, Sanjai and Bolton, Brian},
 journal={Journal of corporate finance},
 volume={14},
 number={3},
 pages={257--273},
 year={2008},
 publisher={Elsevier}
 abstract={How is corporate governance measured? What is the relationship between corporate governance and performance? This paper sheds light on these questions while taking into account the endogeneity of the relationships among corporate governance, corporate performance, corporate capital structure, and corporate ownership structure. We make three additional contributions to the literature:

First, we find that better governance as measured by the Gompers, Ishii, and Metrick [Gompers, P.A., Ishii, J.L., and Metrick, A., 2003, Corporate governance and equity prices, Quarterly Journal of Economics 118(1), 107–155.] and Bebchuk, Cohen and Ferrell [Bebchuk, L., Cohen, A., and Ferrell, A., 2004, What matters in corporate governance?, Working paper, Harvard Law School] indices, stock ownership of board members, and CEO-Chair separation is significantly positively correlated with better contemporaneous and subsequent operating performance.

Second, contrary to claims in GIM and BCF, none of the governance measures are correlated with future stock market performance. In several instances inferences regarding the (stock market) performance and governance relationship do depend on whether or not one takes into account the endogenous nature of the relationship between governance and (stock market) performance.

Third, given poor firm performance, the probability of disciplinary management turnover is positively correlated with stock ownership of board members, and board independence. However, better governed firms as measured by the GIM and BCF indices are less likely to experience disciplinary management turnover in spite of their poor performance.

}

Gompers et al 2003

@techreport{gompers2001corporate,
 title={Corporate governance and equity prices},
 author={Gompers, Paul A and Ishii, Joy L and Metrick, Andrew},
 year={2001},
 institution={National bureau of economic research}
}

Harford et al 2006

@incollection{harford2012corporate,
 title={Corporate governance and firm cash holdings in the US},
 author={Harford, Jarrad and Mansi, Sattar A and Maxwell, William F},
 booktitle={Corporate Governance},
 pages={107--138},
 year={2012},
 publisher={Springer}
}

Giroud & Miller 2011

@article{giroud2011corporate,
 title={Corporate governance, product market competition, and equity prices},
 author={Giroud, Xavier and Mueller, Holger M},
 journal={The Journal of Finance},
 volume={66},
 number={2},
 pages={563--600},
 year={2011},
 publisher={Wiley Online Library}
}