Does Corporate Governance Matter in Competitive Industries?

48 Pages Posted: 9 Aug 2007 Last revised: 27 Dec 2007

See all articles by Xavier Giroud

Xavier Giroud

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

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)

Multiple version iconThere are 5 versions of this paper

Date Written: December 2007

Abstract

By reducing the fear of a hostile takeover, business combination (BC) laws weaken corporate governance and create more opportunity for managerial slack. Using the passage of BC laws as a source of variation in corporate governance, we examine if these laws have a different effect on firms in competitive and non-competitive industries. We find that while firms in non-competitive industries experience a significant drop in performance after the laws' passage, firms in competitive industries experience virtually no effect. While consistent with the general notion that competition mitigates managerial agency problems, our results are, in particular, supportive of the (stronger) Alchian-Friedman-Stigler hypothesis that competitive industries leave no room for managerial slack. When we examine which agency problem competition mitigates, we find evidence in support of a "quiet-life" hypothesis. While capital expenditures are unaffected by the passage of the BC laws, input costs, wages, and overhead costs all increase, and only so in non-competitive industries. We also conduct event studies around the dates of the first newspaper reports about the BC laws. We find that while firms in non-competitive industries experience a significant stock price decline, firms in competitive industries experience a small and insignificant price impact.

Keywords: corporate governance, business combination laws, product market competition

JEL Classification: G14, G32, G34, K22

Suggested Citation

Giroud, Xavier and Mueller, Holger M., Does Corporate Governance Matter in Competitive Industries? (December 2007). ECGI - Finance Working Paper No. 185/2007; 2nd Annual Conference on Empirical Legal Studies Paper. Available at SSRN: https://ssrn.com/abstract=1006118 or http://dx.doi.org/10.2139/ssrn.1006118

Xavier Giroud

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

HOME PAGE: http://www.columbia.edu/~xg2285/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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)

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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