Value of voting and other issues in corporate governance

Karakas, Oguzhan (2010) Value of voting and other issues in corporate governance. Doctoral thesis, University of London: London Business School.

Abstract

This thesis consists of four chapters focusing primarily on the area of Corporate Governance. In the first two chapters, I am particularly interested in the value of corporate voting rights and control. Chapter 2 analyzes the time variation of relative prices of stocks with differential voting rights in the world. I find that majority of the publicly traded dual-class shares are fractionally cointegrated. This implies mean-reversion (if long-memory parameter is less than 1) and predictability of future returns using the past prices. A simple long-short strategy yields substantial abnormal returns in the US, even after controlling for known risk factors. I find the long-memory parameter to be negatively correlated with the quality of the firm's corporate governance (of the investor protection) in the US (across countries). In Chapter 3, I propose a new method using option prices to measure the value of the voting right attached to a stock. The method consists of synthesizing a non-voting share using put-call parity, and comparing its price to that of the underlying stock. Empirically, I find this measure of the value of a voting right to increase around shareholder meetings, particularly for those which are contested. The measure is also more frequently positive for activist hedge fund targets. I estimate the mean (median) annualized value of a voting right to be 1.23% (0.86%) of the underlying stock price. Chapter 4 focuses on the board changes in LBOs. The chapter analyzes all UK companies that went from public to private between 1998 and 2003, with a particular attention to the buyouts with a private equity backing. We find that, when a company goes private, board size and composition change drastically and that private equity board members are most active in complex and challenging transactions. We also find that the presence of LBO sponsors on the board does not increase CEO turnover but increases operating performance. Chapter 5 examines the impact of the color-coded terror alert level set by the US Department of Homeland Security on capital markets.