Abstract
ABSTRACT Purpose: This paper analyses the viability of stock trading as a mechanism to promote corporate governance, addressing its effects on abnormal returns, information, and firm performance. Originality/value: The study indicates that competition among institutional investors is important to raise stock price efficiency. Policies that allow capital inflow, increase in liquidity, and a link between managers’ salaries and stock performance are beneficial to reinforce the stock market efficiency. Design/methodology/approach: Hypotheses testing using panel data regressions of 233 stocks between December 2009 to December 2017 from Thomson Eikon, Economatica and ComDinheiro. Findings: The results indicate that the number of institutional investors is not related to abnormal returns. On the other hand, the number of institutional investors increases the amount of firm-specific information into stock prices, rising stock market price efficiency. This relationship is stronger among the preferred stocks (PN), but this mechanism is still not valid to increase firms’ operational performance. Despite the possible increase in stock price efficiency, the investors cannot adopt such a mechanism to exercise governance if there is no remuneration linked to performance.
Highlights
After a series of negotiations, two companies, A and B, conclude that a merger will create value
RiskControls are the variables associated with risk factors: the stock beta (Beta), to control for market risk; market value of equity ((In(MV)) to control for small firms’ effect; Market-to-book (In(M / B)) to control for the value effect; Financial Leverage (Debt), to control for the leverage effect; The number of days with zero returns (Zeros) to control for illiquidity effect; and Analyst Coverage (In(Analy)) to control for informational effect (Girão, 2016)
According to the estimated coefficients (Figure 4.1.1), it is not possible to affirm that the competition among institutional investors reduces the abnormal returns
Summary
After a series of negotiations, two companies, A and B, conclude that a merger will create value. Recent theories of corporate governance affirm that it is possible to exercise control by trading stocks or by liquidation threat (Edmans & Manso, 2011) These theories merge with market microstructures literature by assuming that the trading activity of informed investors incorporates private information into prices, increasing market efficiency and operational performance (Edmans & Holderness, 2017). Diffuse property reduces the effectiveness of direct intervention by voting, it increases the efficiency of trading as a governance mechanism (Edmans & Manso, 2011) In this literature stream, a blockholder is a shareholder with informational advantage and sufficient power to induce intervention. Shareholders can sell their stocks to reduce stock prices and impact managers’ salaries (when based on Governance through stock trading in Brazil: Evidence with institutional investors stock performance), raise takeover risks and undermine subsequent stock issues (Edmans & Manso, 2011)
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