Does Corporate Governance Matter in Competitive Industries?

45 Pages Posted: 3 Nov 2008

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

affiliation not provided to SSRN

Multiple version iconThere are 5 versions of this paper

Date Written: August 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 operating 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 Alchian-Friedman-Stigler hypothesis that managerial slack cannot exist, or survive, in competitive industries. When we examine which agency problem competition mitigates, we find evidence in favor of a â¬Squiet-lifeâ¬? 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 studiesaround 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, firms in competitive industries experience a small and insignificant price impact.

Suggested Citation

Giroud, Xavier and M. Mueller, Holger, Does Corporate Governance Matter in Competitive Industries? (August 2007). NYU Working Paper No. FIN-07-021. Available at SSRN: https://ssrn.com/abstract=1293603

Xavier Giroud (Contact Author)

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

affiliation not provided to SSRN

No Address Available

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