Blockholders and corporate governance

This study contains two essays. In the first essay, we study the role of foreign investors in the corporate governance of U.S. firms. Using a sample of 257 partial acquisitions of U.S. firms by foreign firms during the period 1981-1999, we show that foreign blockholders from countries with strong shareholder rights play a more active role in disciplining managers of U.S. targets than do those from countries with weak shareholder rights. In particular, the probability of nonroutine top executive turnover and the extent of other governance activities by foreign investors, such as the threat of hostile takeovers and the demand for representatives on the target's board, are positively related to the shareholder rights score of their home countries. This positive relationship, however, is mainly driven by the subsample of acquisitions in which foreign investors do not have any business relationships with U.S. targets (unrelated foreign investors). Abnormal announcement returns for U.S. targets of unrelated foreign investors also display a strong positive association with the level of shareholder rights protection in the acquiring firm country. This result suggests that the stock market takes the increase in the frequency of a foreign acquiring firm's value-enhancing future governance activities for U.S. targets into account when assessing their market values.In the second essay, we examine the role of geographic proximity in corporate governance. Using a sample of 698 partial acquisitions in the U.S. during the period of 1990-1999, we find that geographically proximate block acquirers are more likely to be involved in governance activities in target firms than are remote block acquirers. Acquirers located within the same state as targets (in-state acquirers) or those who are located within 250 miles of target firms (local acquirers) are more likely to have their representatives on the target's board and replace target management after block share purchases. In addition, targets of in-state and local acquirers experience higher abnormal announcement returns and post-acquisition operating performance than those of other acquirers. Furthermore, these effects are strongest when target firms are small or have poor past performance and higher insider ownership. Finally, we find that block acquirers have strong preference for local firms. Our results suggest that geographically proximate investors have significant advantages in terms of governance activities over remote investors and such governance activities affect operating performance and the value of firms.