Corporate Governance, Product Market Competition and Equity Prices
Posted: 21 Apr 2010
Date Written: April 21, 2010
This paper examines whether firms in non-competitive industries benefit relatively more from good governance than do firms in competitive industries. Consistent with this hypothesis, we find that weak governance firms, as measured by the G-index, have lower equity returns, worse operating performance, and lower firm value, but only so in non-competitive industries. When we examine the nature of the underlying agency cost, we find that weak governance firms have lower labor productivity, higher input costs, and make more value-destroying acquisitions, but, again, only so in non-competitive industries. We also find that weak governance firms in non-competitive industries are more likely to be targeted by activist hedge funds, suggesting that investors are taking actions to mitigate the inefficiency.
Keywords: Corporate Governance, Product Market Competition
JEL Classification: G34
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