- Anything that causes market perception of the
likelihoodofmanagementchangeto shiftcanhave
largeeffects onall stocks.Ahostileacquisition of
one company, for instance, may lead investors to
change their assessments of the likelihood of
managementchangeforallcompanies,resultinginan
increase in stock prices. Since hostile acquisitions
often are clustered in a particular sector—oil
companiesintheearly1980s,forinstance—itisnot
surprising that a hostile acquisition of a single
companyoftenleadstoincreasesin stockpricesof
companies in its peer group. - Poor corporate governance leads to lower stock
prices.Thepriceofpoorcorporategovernancecanbe
seenin stockprices.After all,theessenceof good
corporategovernanceisthatitgivesstockholdersthe
powertochangethemanagementofbadlymanaged
companies. Consequently, stock pricesin a market
wherecorporategovernanceiseffectivewillreflecta
highlikelihoodofchangeforbadmanagementanda
higherexpectedvalue forcontrol. Incontrast,it is
difficult,ifnotimpossible,to dislodgemanagersin
marketswherecorporategovernanceisweak.Stock
prices in these markets will therefore incorporate
lowerexpectedvaluesforcontrol.Thedifferencesin
corporate governance are likely to manifest
themselvesmost intheworstmanagedfirms inthe
market.
Empirical Evidence
Theonlywaytoempiricallytestthepropositionthatthestock
pricesofallfirmsincorporatetheexpectedvalueofcontrolis