A Quick Overview of Research

on Corporate Governance

Ouzhan Karaka

MFIN1127-04: Corporate Finance

Lecture 2

January 2017 - Boston College

Overview

Corporate Governance
Mergers & Acquisitions
Activism
One Share One Vote
Law & Finance
Boards of Directors
Executive Compensation

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Mergers and Acquisitions (1/2)
Waves
1965-1969: Holding wave. Internal capital markets.

1981-1989: Hostile takeovers. Mergers and

acquisitions with leverage (e.g., MBO/LBO). Very high
premia. Sophisticated takeover strategies.

1992-2000: Mergers in banking and utilities. Strategic

mergers in dynamic industries such as IT and
communications.Very high premia.

2000-: Tech bubble. Shareholder activism. Activities of

hedge funds and Private Equity. Financial crisis.

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Mergers and Acquisitions (2/2)

M&A usually creates value for the target firms

shareholders.
Market for corporate control.
Takeovers lead to better Corporate Governance:
Proxy fights,
Takeovers,
Mergers.

Anti-takeover devices.
These devices might prevent the market for corporate control:
Poison pills,
Dual-class shares,
Staggered boards.

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Shareholder Activism
Three main ways to influence the Corporate
Governance:
Exit: Sale of shares (voting with feet).
Voice:Writing letters, meetings with management, voting.
Loyalty: Holding the shares.
Waves.
1990s: Institutional activism (e.g., mutual and pension funds).
2000s: Hedge fund activism.
Impact.
Institutional: Negligible.
Hedge Fund: Aggressive and effective. 7-10% abnormal returns.
US: Brav et al. 2008-JF, Klein and Zur 2009-JF.
Europe: Franks et al. 2008-JF.

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One Share One Vote (1/2)

Disproportional ownership.
Explicit methods: Pyramids, dual-class shares, cross ownership
etc.
Implicit methods: Share lending, derivatives etc.
Recent surveys commissioned by EU.
Empirics:Adams and Ferreira, 2008-RF.
Theory: Burkart and Lee, 2008-RF.
Methods of measuring the value of control:
Dual-class shares (e.g., Nenova, 2003-JFE).
Sale of Control block shares (e.g., Barclay and Holderness, 1989-
JFE).
Derivatives (e.g., Kalay, Karaka, and Pant, 2014-JF).

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One Share One Vote (2/2)

Value of control: (Nenova, 2003-JFE and Dyck and Zingales, 2004-JF)

Country Dual Control Block

UK 0.096 0.014
US 0.020 0.010
Italy 0.294 0.369
Brazil 0.232 0.650
France 0.281 0.019
Turkey - 0.370
South Korea 0.289 0.157
Germany 0.095 0.095
Denmark 0.008 0.077
Sweden 0.010 0.074

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Law and Finance
Law families.
Common Law
Civil Law
Anti-director & creditor scores: (La Porta et al. 1998-JPE, West 2002, FIFA 2002)
Country Anti-director Creditor FIFA

UK 5 4 12(Eng)
4,00 3,11
US 5 1 13
Italy 1 2 6
Brazil 0 1 2
2,33 1,58
France 3 0 1
Turkey 2 2 22
South Korea 2 3 40
2,33 2,33
Germany 1 3 11
Denmark 2 3 20
3,00 2,00
Sweden 3 2 19

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Boards of Directors
Boards.
Monitoring & Advice.
Overview:
Size: Smaller boards are more efficient. (Yermack, 1996-JFE)

Composition: Independent board members are more effective

(especially for monitoring) (e.g.,Weisbach 1988-JFE)
Control: (Morck et al., 1988-JFE)

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Executive Compensation
Two views:
Efficient.
Optimal contracting.
Managerial hedging.
Inefficient.
Abuse of power by management.

Source: Frydman and

Saks, 2005 WP
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