Are the Seeds of Bad Governance Sown in Good Times?
38 Pages Posted: 23 May 2011 Last revised: 13 Feb 2021
Date Written: May 2011
This paper examines the extent to which the corporate governance structure of a firm arises endogenously in response to its performance. We demonstrate that following periods of abnormally good performance, managers are more likely to call special meetings and to propose and pass governance measures that are contrary to shareholder interests (based on IRRC classification). These results are driven primarily by firms that are characterized as having poor governance according to either the GIM Index or the proportion of activist shareholders. Following these special meetings, we find that the next quarter performance of the firm is negative. Our results are consistent with an interpretation of shareholder inattention to governance following good firm performance or a desire to reward management for good past performance. Overall, our evidence seems more consistent with the former interpretation.
Suggested Citation: Suggested Citation