Tradeoffs between Internal and External Governance: Evidence from Exogenous Regulatory Shocks

Financial Management, Forthcoming

51 Pages Posted: 14 Jul 2011 Last revised: 19 Feb 2016

See all articles by Lixiong Guo

Lixiong Guo

University of Alabama - Culverhouse College of Business

Patrick A. Lach

Lach Financial, LLC; Indiana University Southeast - School of Business

Shawn Mobbs

University of Alabama - Culverhouse College of Business Administration

Date Written: May 21, 2014

Abstract

We use the 2002 NYSE and NASDAQ listing requirements mandating firms to have a majority of independent directors on the board as an exogenous shock to examine the interaction between internal and external governance. Relative to compliant firms, non-compliant firms significantly reduced exposure to three external governance mechanisms: the market for corporate control, shareholder activism, and credit markets, by adding antitakeover provisions, adopting officer and director protection provisions, and reducing debt levels, respectively. The results are stronger in firms with greater exposure to the relevant external governance mechanism. The evidence suggests that firms treat internal and external governance as substitutes.

Keywords: external governance, internal governance, shareholder activism, corporate control

JEL Classification: G34, G38

Suggested Citation

Guo, Lixiong and Lach, Patrick A. and Mobbs, Shawn, Tradeoffs between Internal and External Governance: Evidence from Exogenous Regulatory Shocks (May 21, 2014). Financial Management, Forthcoming . Available at SSRN: https://ssrn.com/abstract=1884302 or http://dx.doi.org/10.2139/ssrn.1884302

Lixiong Guo

University of Alabama - Culverhouse College of Business ( email )

Culverhouse College of Business
Tuscaloosa, AL 35487-0223
United States

Patrick A. Lach

Lach Financial, LLC ( email )

3046 Breckenridge Lane
Suite 202
Louisville, KY 40220
United States

Indiana University Southeast - School of Business ( email )

4201 Grant Line Road
New Albany, IN 47150
United States

Shawn Mobbs (Contact Author)

University of Alabama - Culverhouse College of Business Administration ( email )

101 Paul W. Bryant Dr.
Box 870382
Tuscaloosa, AL 35487
United States

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