Concentrating on Governance

Abstract:     
Does corporate governance matter for shareholder value? We examine this notoriously difficult question by modeling and testing a product market channel through which antitakeover provisions affect value. The central insight of our model is that the valuation effect of antitakeover provisions varies with the degree of industry concentration. This insight delivers several unique cross-sectional predictions: (1) firms in concentrated industries should be more likely to adopt antitakeover provisions; (2) antitakeover provisions should lead to higher takeover premiums, but only in concentrated industries; (3) antitakeover provisions should be associated with higher shareholder value, but only in concentrated industries. We test these predictions using a large sample of manufacturing firms over the 1990 to 2005 period and find robust support for our theory. Our results suggest that governance reforms directed toward weakening takeover defenses may come with benefits, but also with costs.

Keywords: Corporate Governance, Industry Concentration, Antitakeover Provisions, Market for Corporate Control

JEL Classifications: G30, G34

Working Paper Series