Good Monitoring, Bad Monitoring

Abstract:     
Are courts effective monitors of corporate decisions? In a controversial landmark case, the Delaware Supreme Court held directors personally liable for breaching their fiduciary duties, signaling a sharp increase in Delaware’s scrutiny over corporate decisions. In low-growth industries, Delaware firms outperformed matched non-Delaware firms by 1% in the three days around the decision. In contrast, in high-growth industries, Delaware firms under-performed by 1%. Contrary to previous literature, we conclude that court decisions can have large, significant and heterogeneous effects on firm value, and that rules insulating directors from court scrutiny benefit the fastest growing sectors of the economy.

Number of Pages in PDF File: 50

Keywords: monitoring, corporate governance, case law, regulation

JEL Classification: G32, G34, G38, L51

working papers series