The Market Reaction to Corporate Governance Regulation
David F. Larcker
Stanford University - Graduate School of Business
University of Navarra, IESE Business School
Daniel J. Taylor
University of Pennsylvania - The Wharton School
October 14, 2010
Journal of Financial Economics, Volume 101, Issue 2, August 2011, Pages 431–448
Rock Center for Corporate Governance at Stanford University Working Paper Series No. 82
This paper investigates the market reaction to recent legislative and regulatory actions pertaining to corporate governance. The managerial power view of governance suggests that executive pay, the existing process of proxy access, and various governance provisions (e.g., staggered boards and CEO-chairman duality) are associated with managerial rent extraction. This perspective predicts that broad government actions that reduce executive pay, increase proxy access, and ban such governance provisions are value enhancing. In contrast, another view of governance suggests that observed governance choices are the result of value-maximizing contracts between shareholders and management. This perspective predicts that broad government actions that regulate such governance choices are value destroying. Consistent with the latter view, we find that the abnormal returns to recent events relating to corporate governance regulations are, on average, decreasing in CEO pay, decreasing in the number of large blockholders, decreasing in the ease by which small institutional investors can access the proxy process, and decreasing in presence of a staggered board.
Number of Pages in PDF File: 52
Keywords: corporate governance, executive compensation, proxy access, SEC regulation
JEL Classification: G1, G3, K2, L5
Date posted: April 14, 2015 ; Last revised: June 20, 2015
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