Investability, corporate governance and firm value

Abstract

Dedicated to the memory of my baby daughter Orla. JEL classification: G15, G34, F36Keywords: Investability Corporate governance Tobin's q a b s t r a c tIn this paper, I show that "investable premia" are greatest for transparent, well-governed firms. I find that single-class share investable firms and better-governed firms reap the largest valuation gains from becoming investable. Dual-class share firms do gain from becoming investable, but their gains are much lower than that of single-class share firms. These findings suggest that the failure on the part of firms to remedy agency conflicts prior to becoming investable only serves to greatly reduce, or even nullify their "investable premia".

More on the relationship between corporate governance and firm performance in the UK: Evidence from the application of generalized method of moments estimation

“…They however, reported an increase in the number of firms which follow good corporate governance practices after the Cadbury Report. Similarly, Gompers, Ishii & Metrick (2003), Brown and Caylor (2006), Bozec, Dia & Bozec (2008) and O'Connor (2012) indicate a positive association between governance and firms' performance. Moreover, other studies, such as, Core, Guay & Rusticus (2006), Gupta, Kennedy & Weaver (2009) and Pandeya, Vithessonthia and Mansi (2015) report an insignificant relationship between governance and firms' performance.…”

Equity Market Liberalization and Firm Growth

“…The tests by corporate governance will shed further light on the underlying sources of the "investable premia" documented by Mitton and O'Connor (2012) and O'Connor (2012). The former uncover an "investable premium" in the region of 9% for investable firms, and the latter show the premium is largest for single-class share firms.…”

“…Turnover is total shares traded in each year divided by the total number of shares outstanding at the end of the year. 25 For example, both Mitton and O'Connor (2012) and O'Connor (2012) show that investable firms are worth more than non-investable firms even prior to becoming investable. Furthermore, the IFC designate firms as investable based on a number of criteria, one being shares traded (liquidity).…”

“…With some exceptions (see Rodrik, 1998), this line of inquiry has shown equity market liberalizations in a good light. For example, at the firm-level, equity market liberalizations serve to increase investment and improve operating performance (see Bae and Goyal, 2010;Mitton, 2006), heighten firm visibility, improve corporate governance (see Bae et al, 2006), and increase firm value (see Bae and Goyal, 2010;Mitton and O'Connor, 2012;O'Connor, 2012). At the country-level, equity market liberalizations result in increased investment and economic growth (see Bekaert et al, 2005Bekaert et al, , 2007Bekaert et al, , 2010.…”

Legal Protection of Investors, Corporate Governance, and Investable Premia in Emerging Markets

“…The intuition is that if better-governed firms reap the largest value gains from becoming investable, then, a priori, we would expect that single-class share firms, and firms with concentrated inside ownership (as measured using closely-held shares as a % of common shares outstanding) would enjoy the largest "investable premia". Recent works by Bae and Goyal (2010) and O'Connor (2012) suggest that 8 The test-statistics are from a pooled regression which includes the investable dummy and the interaction of the investable dummy and an indicator variable which is 1 if country-level investor protection is high (above-median) (e.g. Investable * High IP, where IP is country-level investor protection).…”