Does Institutional Activism Increase Shareholder Wealth?: Evidence from Spillovers on Non-Target Companies
Journal of Corporate Finance, pp. 488-504, 2009
43 Pages Posted: 16 Jul 2007 Last revised: 24 May 2011
Date Written: July 9, 2007
Abstract
This paper presents evidence of the shareholder wealth effect of institutional activism using its spillovers on non-target companies. The spillovers are instructive because they are a response to an exogenous shock and thus create an environment to conduct a clean event study. In particular, we examine the spillover effects of the first target announcement of the Korea Corporate Governance Fund. As the very first sign of institutional activism in the country, this announcement creates an expectation of similar governance efforts even in non-target companies, especially in those companies whose governance is currently poorer and thus the scope for future activism is greater. Consistent with institutional activism contributing to shareholder wealth, we find that, among non-targets, those firms granting fewer rights to outside shareholders experience a more positive stock price reaction. Further analysis lends additional support to the positive wealth effect of institutional activism.
(This paper is a significantly revised version of the paper titled "Corporate governance and firm value: Endogeneity-free evidence from Korea" (co-authored with Jung Yong Choi). The final working paper version is linked to this page.)
Keywords: Governance, Firm value, Endogeneity, Korean Corporate Governance Fund
JEL Classification: G30, G34
Suggested Citation: Suggested Citation
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