Governance through trading on acquisitions of public firms

Eric C. Chang, Tse-Chun Lin and Xiaorong Ma

Journal of Corporate Finance, 2020, vol. 65, issue C

Abstract: We identify an important channel, acquisitions of public targets, via which the governance through trading (GTT) improves firm values. The disciplinary effect of GTT is more pronounced for firms with higher managerial wealth-performance sensitivity and moderate institutional ownership concentration. Firms with higher GTT also have higher subsequent ROA, ROE, Tobin's Q, analysts forecasted EPS growth rate, and lower expected default risk. The effect is stronger after Decimalization. We conduct several exercises to rule out alternative explanations, such as institutional superior information, investor activism, and momentum. Additional tests show that the disciplinary effect of GTT only exists for less financially-constrained firms and non-all-cash M&As where the agency problem is more likely to be prevalent.

Keywords: Governance through trading; Corporate investments; Mergers and acquisitions; Wealth performance sensitivity; Decimalization (search for similar items in EconPapers)
JEL-codes: G20 G30 G32 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:65:y:2020:i:c:s092911992030208x

DOI: 10.1016/j.jcorpfin.2020.101764

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