This paper analyzes the process of private negotiations between financial institutions and the companies they attempt to inf luence. It relies on a private database consisting of the correspondence between TIAA-CREF and 45 firms it contacted about governance issues between 1992 and 1996. This correspondence indicates that TIAA-CREF is able to reach agreements with targeted companies more than 95 percent of the time. In more than 70 percent of the cases, this agreement is reached without shareholders voting on the proposal. We verify independently that at least 87 percent of the targets subsequently took actions to comply with these agreements.FINANCIAL INSTITUTIONS ARE WIDELY BELIEVED to play an increasingly important role in corporate governance. Black~1992! and Pound~1992a, 1992b!, for example, have argued that because of the demise of the 1980s hostile takeover market, the "market-based model" of corporate governance has evolved into a "political-based model." Understanding the way in which institutions inf luence firms clearly is an important research topic in corporate governance.The process by which firms and institutions interact is much more involved than a casual reading of the current academic literature would imply. When an institution has an issue it is concerned about, it typically will contact a firm privately about the issue first. Depending on the firm's response, the institution will determine whether to file a proxy resolution. The process potentially is repeated for several years until either the firm changes its policy or the institution decides not to pursue matters further. One reason why existing research does not capture the intertemporal nature of this relationship is that the details of the negotiations between the institution and the firm, and often the very existence of such negotiations, are private and * All authors are at the University of Arizona. We are extremely grateful to Dick Schlefer and Rita Gorman at TIAA-CREF for their help throughout the research process, especially in gathering the sample we use in this paper. We are also grateful to Virginia Rosenbaum of the Investor Responsibility Research Center for providing us with data to verify corporate governance changes. We thank

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I examine two anomalies where the Fama and French three-factor model fails to adequately explain monthly industry and index returns. Both anomalies are consistent with a bad model problem where the book-to-market factor introduces a negative bias in the intercepts. I propose the intangibles model as an alternative where the three-factor model is known to have difficulty. This alternative model, which replaces the book-to-market factor with zero investment portfolio returns based on prior investments in intangible assets, is well specified in random samples, has comparable power, and fully explains both anomalies. 2006 The Southern Finance Association and the Southwestern Finance Association.

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