Does 'Good' Corporate Governance Help in a Crisis? The Impact of Country‐ and Firm‐Level Governance Mechanisms in the European Financial Crisis

24 Pages Posted: 9 Apr 2013

See all articles by Marc van Essen

Marc van Essen

University of South Carolina - Darla Moore School of Business; University of South Carolina - Darla Moore School of Business

Peter‐Jan Engelen

Utrecht University

Michael Carney

Concordia University, Quebec - John Molson School of Business

Date Written: May 2013

Abstract

Manuscript Type. Empirical. Research Question/Issue. We examine the effects of firm‐ and country‐level “good” corporate governance prescriptions on firm performance before and during the recent financial crisis, using a large sample of 1,197 firms across 26 European countries. Research Findings/Insights. We propose a contextualized agency perspective suggesting that firm‐ and country‐level good governance prescriptions designed to assure managerial oversight may not hold in a financial crisis. This is because firms can benefit from broadening managerial discretion so as to facilitate the exercise of initiative and decisive leadership. Overall, our firm‐ and country‐level findings support this argument. In a crisis, CEO duality is associated with better performance. We also find that the use of incentive compensation and the existence of a wedge between ownership and control rights negatively impacts on firm performance in a crisis. Hierarchical linear modeling shows that 25 percent of the heterogeneity in firm performance is among countries, indicating the importance of including country‐level institutions in our analyses. In a crisis, we find that the general quality of the legal system and creditor rights protection are positively related to firm performance, but protection for equity investors is not. Theoretical/Academic Implications. The findings challenge the universality of good governance prescriptions and contribute to the growing body of work proposing that the efficacy of governance mechanisms may be contingent upon organizational and environmental circumstances. Practitioner/Policy Implications. The study offers insights relevant to policy and practitioner communities, showing that governance mechanisms operate differently in crisis and non‐crisis periods. The tendency to respond to a crisis with more stringent rules may be counterproductive since such measures may compromise executives' ability to respond appropriately to systemic shocks. Practitioners are encouraged to optimize rather than maximize their governance choices.

Keywords: Corporate Governance, Board of Directors, CEO Compensation, European Countries, Executive Discretion, Financial Crisis, Ownership

Suggested Citation

Essen, Marc van and Essen, Marc van and Engelen, Peter‐Jan and Carney, Michael, Does 'Good' Corporate Governance Help in a Crisis? The Impact of Country‐ and Firm‐Level Governance Mechanisms in the European Financial Crisis (May 2013). Corporate Governance: An International Review, Vol. 21, Issue 3, pp. 201-224, 2013, Available at SSRN: https://ssrn.com/abstract=2247214 or http://dx.doi.org/10.1111/corg.12010

Marc van Essen (Contact Author)

University of South Carolina - Darla Moore School of Business ( email )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States

University of South Carolina - Darla Moore School of Business ( email )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States

Peter‐Jan Engelen

Utrecht University

Vredenburg 138
Utrecht, 3511 BG
Netherlands

Michael Carney

Concordia University, Quebec - John Molson School of Business ( email )

1455 de Maisonneuve Blvd. W.
Montreal, Quebec H3G 1M8
Canada

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