Abstract

http://ssrn.com/abstract=1247715
 
 

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Corporate Governance, Product Market Competition, and Equity Prices


Xavier Giroud


Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Holger M. Mueller


New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

August 22, 2008

ECGI - Finance Working Paper No. 219/2008

Abstract:     
This paper examines the hypothesis that firms in competitive industries should benefit relatively less from good governance, while firms in non-competitive industries - where lack of competitive pressure fails to enforce discipline on managers - should benefit relatively more. Whether we look at the effects of governance on long-horizon stock returns, firm value, or operating performance, we consistently find the same pattern: The effect is monotonic in the degree of competition, it is small and insignificant in competitive industries, and it is large and significant in non-competitive industries. By implication, the effect of governance (in non-competitive industries) reported in this paper is stronger than what has been previously reported in Gompers, Ishii, and Metrick (2003, GIM) and subsequent work, who document the average effect across all industries. For instance, GIM's hedge portfolio - provided it only includes firms in non-competitive industries - earns a monthly alpha of 1.47%, which is twice as large as the alpha reported in GIM. The alpha remains large and significant even if the sample period is extended until 2006. We also revisit the argument that investors in the 1990s anticipated the effect of governance, implying that the alpha earned by GIM's hedge portfolio is likely due to an omitted risk factor. We find that while investors were indeed not surprised on average, they underestimated the effect of governance in non-competitive industries, the very industries in which governance has a significant effect in the first place.

Number of Pages in PDF File: 48

Keywords: Corporate Governance, Product Market Competition, G-index

JEL Classification: D4, G3

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Date posted: August 25, 2008 ; Last revised: October 12, 2008

Suggested Citation

Giroud, Xavier and Mueller, Holger M., Corporate Governance, Product Market Competition, and Equity Prices (August 22, 2008). ECGI - Finance Working Paper No. 219/2008. Available at SSRN: http://ssrn.com/abstract=1247715 or http://dx.doi.org/10.2139/ssrn.1247715

Contact Information

Xavier Giroud
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
77 Massachusetts Ave.
E62-416
Cambridge, MA 02142
United States
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Holger M. Mueller (Contact Author)
New York University (NYU) - Department of Finance ( email )
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0341 (Phone)
212-995-4233 (Fax)
HOME PAGE: http://www.stern.nyu.edu/~hmueller/
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
European Corporate Governance Institute (ECGI) ( email )
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
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