Are the Seeds of Bad Governance Sown in Good Times?

Abstract:     
This paper examines the extent to which corporate governance structure arises endogenously with respect to firm performance. We demonstrate that following periods of abnormally good performance managers are more likely to call special meetings and to propose and pass bad governance measures. These results are driven by firms that begin the sample time frame characterized as having poor governance according to either the GIM Index or the proportion of active shareholders. While we cannot definitively separate out the extent to which our results are driven by shareholders’ desire to reward management for good performance or shareholders’ inattention following that good performance, we provide evidence consistent with the latter interpretation.

working papers series