The Market Reaction to Corporate Governance Regulation

52 Pages Posted: 14 Apr 2015 Last revised: 20 Jun 2015

David F. Larcker

Stanford University - Graduate School of Business

Gaizka Ormazabal

University of Navarra, IESE Business School

Daniel J. Taylor

University of Pennsylvania - The Wharton School

Date Written: October 14, 2010

Abstract

This paper investigates the market reaction to recent legislative and regulatory actions pertaining to corporate governance. The managerial power view of governance suggests that executive pay, the existing process of proxy access, and various governance provisions (e.g., staggered boards and CEO-chairman duality) are associated with managerial rent extraction. This perspective predicts that broad government actions that reduce executive pay, increase proxy access, and ban such governance provisions are value enhancing. In contrast, another view of governance suggests that observed governance choices are the result of value-maximizing contracts between shareholders and management. This perspective predicts that broad government actions that regulate such governance choices are value destroying. Consistent with the latter view, we find that the abnormal returns to recent events relating to corporate governance regulations are, on average, decreasing in CEO pay, decreasing in the number of large blockholders, decreasing in the ease by which small institutional investors can access the proxy process, and decreasing in presence of a staggered board.

Keywords: corporate governance, executive compensation, proxy access, SEC regulation

JEL Classification: G1, G3, K2, L5

Suggested Citation

Larcker, David F. and Ormazabal, Gaizka and Taylor, Daniel J., The Market Reaction to Corporate Governance Regulation (October 14, 2010). Journal of Financial Economics, Volume 101, Issue 2, August 2011, Pages 431–448; Rock Center for Corporate Governance at Stanford University Working Paper Series No. 82. Available at SSRN: https://ssrn.com/abstract=1650333

David F. Larcker (Contact Author)

Stanford University - Graduate School of Business ( email )

Graduate School of Business
518 Memorial Way
Stanford, CA 94305-5015
United States
650-725-6159 (Phone)

Gaizka Ormazabal

University of Navarra, IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

Daniel Taylor

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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