The Market Reaction to Corporate Governance Regulation

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

See all articles by David F. Larcker

David F. Larcker

Stanford University - Graduate School of Business; European Corporate Governance Institute (ECGI); Stanford University - Arthur & Toni Rembe Rock Center for Corporate Governance

Gaizka Ormazabal

University of Navarra, IESE Business School; European Corporate Governance Institute (ECGI)

Daniel J. Taylor

The Wharton School, University of Pennsylvania

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, 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
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Stanford, CA 94305-5015
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650-725-6159 (Phone)

European Corporate Governance Institute (ECGI) ( email )

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Belgium

Stanford University - Arthur & Toni Rembe Rock Center for Corporate Governance ( email )

Crown Quadrangle 559 Nathan Ab
Stanford, CA 94305-8610
United States

Gaizka Ormazabal

University of Navarra, IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Daniel Taylor

The Wharton School, University of Pennsylvania ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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