Product Market Competition and Internal Governance: Evidence from the Sarbanes Oxley Act

45 Pages Posted: 20 Mar 2012 Last revised: 24 Nov 2015

See all articles by Vidhi Chhaochharia

Vidhi Chhaochharia

University of Miami - Department of Finance

Yaniv Grinstein

Cornell University - Samuel Curtis Johnson Graduate School of Management; Interdisciplinary Center (IDC) Herzliyah; European Corporate Governance Institute (ECGI)

Gustavo Grullon

Rice University - Jesse H. Jones Graduate School of Business

Roni Michaely

University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute

Date Written: November 23, 2015

Abstract

We use the Sarbanes Oxley Act (SOX) as a quasi-natural experiment to examine the link between product market competition and internal governance mechanisms. Consistent with notion that competition plays an important role in aligning incentives within the firm, SOX led to a larger improvement in the operation of firms in concentrated industries than in non-concentrated industries. Further, within concentrated industries, the effect is especially pronounced among firms with weaker governance mechanisms prior to SOX. We corroborate these findings using two additional regulatory changes in the U.S. and abroad. Overall, our results indicate that corporate governance is more important when firms face less product market competition.

Keywords: Corporate Governance, Product Market Competition, Sarbanes Oxley

JEL Classification: G34, G38

Suggested Citation

Chhaochharia, Vidhi and Grinstein, Yaniv and Grullon, Gustavo and Michaely, Roni, Product Market Competition and Internal Governance: Evidence from the Sarbanes Oxley Act (November 23, 2015). Forthcoming, Management Science; Johnson School Research Paper Series No. 18-2012. Available at SSRN: https://ssrn.com/abstract=2024733 or http://dx.doi.org/10.2139/ssrn.2024733

Vidhi Chhaochharia

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States

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

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Gustavo Grullon

Rice University - Jesse H. Jones Graduate School of Business ( email )

P.O. Box 2932
Houston, TX 77252-2932
United States
(713) 348-6138 (Phone)
(713) 348-6331 (Fax)

HOME PAGE: http://www.ruf.rice.edu/~grullon/

Roni Michaely

University of Geneva - Geneva Finance Research Institute (GFRI) ( email )

40 Boulevard du Pont d'Arve
Geneva 4, 1211
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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