Does Corporate Governance Matter in Competitive Industries?
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)
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.
Number of Pages in PDF File: 48
Keywords: Corporate Governance, Managerial Incentives, Product Market Competition, Takeover Legislation
JEL Classification: G34
Date posted: March 24, 2008