Pouyan Foroughi

Firms in the same networks tend to have similar corporate governance practices. However, it is difficult to disentangle peer effects, where governance practices propagate from one firm to another, from selection effects, where firms with similar governance preferences self-select into linked groups. Studying board-interlocked firms, we utilize a novel instrument based on the staggered adoption of universal demand laws across states to identify causal peer effects in firms’ decisions concerning CEO compensation, CEO duality, and anti-takeover provisions. Our results provide support for the existence of peer effect in the adoption of anti-takeover provisions. We find that the entrenchment index (E-Index) of a firm increases by 0.33 points for every point increase in the E-Index of firms in the same board interlock network. The impact of universal demand laws on the interlocking directors’ prior experience in passing these provisions is a likely mechanism explaining these effects.

Using a parsimonious measure of investor protection constructed from fund organizational characteristics, this paper documents that companies targeted by activists with better investor protection structures outperform those targeted by those with poor investor protection structures by roughly 10% per year. The outperformance is observed only for active targets for which Schedule 13Ds are filed, not for passive Schedule 13G investments, indicating that the effect is not explained by a superior target-selection ability. The evidence suggests that funds with better investor protection achieve increased profitability and valuation ratio of their targets by reducing agency costs, improving corporate governance, and collaborating with other large institutional investors.