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Good Monitoring, Bad Monitoring

72 Pages Posted: 7 Aug 2011 Last revised: 30 Apr 2014

Yaniv Grinstein

Cornell University - Samuel Curtis Johnson Graduate School of Management; Interdisciplinary Center (IDC) Herzliyah

Stefano Rossi

Bocconi University; Krannert School of Management; Centre for Economic Policy Research (CEPR)

Date Written: April 2014

Abstract

Are courts effective monitors of corporate decisions? In a controversial landmark case, the Delaware Supreme Court held directors personally liable for breaching their fiduciary duties, signaling a sharp increase in Delaware’s scrutiny over corporate decisions. In our event study, low-growth Delaware firms outperformed matched non-Delaware firms by 1% in the three day event window. In contrast, high-growth Delaware firms under-performed by 1%. Contrary to previous literature, we conclude that court decisions can have large, significant and heterogeneous effects on firm value, and that rules insulating directors from court scrutiny benefit the fastest growing sectors of the economy.

Keywords: monitoring, corporate governance, case law, regulation

JEL Classification: G32, G34, G38

Suggested Citation

Grinstein, Yaniv and Rossi, Stefano, Good Monitoring, Bad Monitoring (April 2014). European Corporate Governance Institute (ECGI) - Finance Working Paper No. 418/2014. Available at SSRN: https://ssrn.com/abstract=1906326 or http://dx.doi.org/10.2139/ssrn.1906326

Yaniv Grinstein (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Sage Hall
Ithaca, NY 14853
United States
607-255-8686 (Phone)
607-254-4590 (Fax)

Interdisciplinary Center (IDC) Herzliyah ( email )

P.O. Box 167
Herzliya, 46150
Israel

Stefano Rossi

Bocconi University ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Krannert School of Management ( email )

West Lafayette, IN 47907-1310
United States

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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