Does Corporate Governance Matter in Competitive Industries?

48 Pages Posted: 24 Mar 2008  

Xavier Giroud

Massachusetts Institute of Technology (MIT) - Sloan School of Management; 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: February 2008

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 exogenous 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, Managerial Incentives, Product Market Competition, Takeover Legislation

JEL Classification: G34

Suggested Citation

Giroud, Xavier and Mueller, Holger M., Does Corporate Governance Matter in Competitive Industries? (February 2008). Available at SSRN: https://ssrn.com/abstract=1107269 or http://dx.doi.org/10.2139/ssrn.1107269

Xavier Giroud

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

77 Massachusetts Ave.
E62-416
Cambridge, MA 02142
United States

HOME PAGE: http://www.mit.edu/~xgiroud/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
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)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

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

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