Does Corporate Governance Matter in Competitive Industries?

49 Pages Posted: 5 Jun 2008

See all articles by Xavier Giroud

Xavier Giroud

Columbia University - Columbia Business School, Finance; 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: September 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 identifying variation, we examine if such laws have a different effect on firms in competitive and non-competitive industries. We find that while firms in non-competitive industries experience a substantial drop in performance, firms in competitive industries experience virtually no effect. Though consistent with the general notion that competition mitigates managerial agency problems, our results are, in particular, supportive of the stronger view expressed by A. Alchian, M. Friedman, and G. Stigler that managerial slack cannot survive in competitive industries. When we examine which agency problem competition mitigates, we find evidence consistent with a "quiet-life" hypothesis. While capital expenditures are unaffected by the passage of 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 decline in their stock prices, the stock price impact is small and insignificant in competitive industries.

Keywords: Corporate governance, product market competition

JEL Classification: G34, L1

Suggested Citation

Giroud, Xavier and Mueller, Holger M., Does Corporate Governance Matter in Competitive Industries? (September 2007). CEPR Discussion Paper No. DP6446, Available at SSRN: https://ssrn.com/abstract=1138559

Xavier Giroud (Contact Author)

Columbia University - Columbia Business School, Finance ( email )

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

National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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Holger M. Mueller

New York University (NYU) - Department of Finance ( email )

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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
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United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
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1000 Brussels
Belgium

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