for very helpful comments and discussions. All errors are our own. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

This paper investigates whether improvements in the firm's internal corporate governance create value for shareholders. We analyze the market reaction to governance proposals that pass or fail by a small margin of votes in annual meetings. This provides a clean causal estimate that deals with the endogeneity of internal governance rules. We find that passing a proposal leads to significant positive abnormal returns. Adopting one governance proposal increases shareholder value by 2.8%. The market reaction is larger in firms with more antitakeover provisions, higher institutional ownership, and stronger investor activism for proposals sponsored by institutions. In addition, we find that acquisitions and capital expenditures decline and long-term performance improves.CORPORATE GOVERNANCE PROVISIONS grant managers independence to manage the firm. However, they also insulate managers from the monitoring and control of shareholders.1 Establishing empirically how these provisions affect shareholder value and what type of shareholder rights have greater effects is essential for our understanding of the internal governance of firms. In practice, it is generally difficult to find a setting in which a firm's governance structure changes exogenously. As a result, the existing literature has generally not been able to provide causal estimates of the effect of these corporate governance provisions.2 Furthermore, the range of results in the * Vicente Cuñat, London School of Economics; Mireia Gine, WRDS University of Pennsylvania and Public-Private Sector Research Center, IESE Business School; Maria Guadalupe, INSEAD, NBER, CEPR, and IZA. We are grateful to Ashwini Agrawal; Ann Bartel; Ken Chay; Jeff Coles; Jan Eeckhout; Ray Fisman; Laurie Hodrick; Denis Gromb; Raymond Lim; Marco Manacorda; Zacharias Sautner; David Yermack; and seminar participants at Brown University, Columbia Business School, the University of Edinburgh, Goethe University, LeBow College of Business Conference on Corporate Governance, the London School of Economics, University of Michigan, the New York University Paduano Seminar, and the University of Oregon for their helpful comments and suggestions. The usual disclaimer applies.1 See, for example, Shleifer and Vishny (1997), Becht, Bolton, andRöell (2005), Comment and Schwert (1995), Gompers, Ishii, and Metrick (2003), Bebchuck, Cohen, and Ferrell (2004), and Core, Guay, and Rusticus (2006. 2 Prior research shows that legislative changes that affect external governance measures, such as state-level antitakeover legislation, increase managerial slack and reduce performance (Garvey and Hanka (1999), Bertrand and Mullainathan (2003), Giroud and Mueller (2010)). Internal governance arrangements, the ones developed by the firm itself, have been the subject of much research, but the evidence provided in these papers is mixed and, most importantly, based on correlations rather than on causal estimates. 1943