Product Market Competition, Corporate Governance, and Firm Value: Evidence from the EU-Area
European Financial Management, 19 (3), 2013, pp. 452-469
29 Pages Posted: 28 Feb 2011 Last revised: 19 Jan 2016
Date Written: April 14, 2011
This paper investigates whether the valuation effect of corporate governance depends on the degree of competition in the companies’ product markets in a large international sample covering 14 countries from the European Union (EU). Besides providing external validity of previous U.S.-centered studies, this paper uses more comprehensive and reliable measures of both product market competition and corporate governance. Consistent with the hypothesis that product market competition acts as a substitute for corporate governance as competitive pressure imposes discipline on managers to maximize firm value, our results show that corporate governance significantly increases firm value in non-competitive industries only. When investigating the channels through which firm value may be increased, we find that good governance for firms in non-competitive industries leads them to have more capital expenditures, spend less on acquisitions, and be less likely to diversify. Our results are robust to a large number of robustness checks including the use of alternative measures of competition and governance, as well as using alternative regression specifications.
Keywords: Product Market Competition, Corporate Governance, Firm Valuation
JEL Classification: G34, G38, L1
Suggested Citation: Suggested Citation