Tradeoffs in Corporate Governance: Evidence from Board Structures and Charter Provisions

48 Pages Posted: 19 Jul 2006

See all articles by Stuart Gillan

Stuart Gillan

University of Georgia - Department of Finance

Jay C. Hartzell

University of Texas at Austin - Department of Finance

Laura T. Starks

University of Texas at Austin - Department of Finance

Date Written: June 2006

Abstract

We provide arguments and present evidence that corporate governance structures are composed of interrelated mechanisms, which are in turn endogenous responses to the costs and benefits firms face when they choose those mechanisms. Examining board structures and the use of corporate charter provisions in a sample of more than 2,300 firms over a four-year period we find that firms cluster in their use of governance mechanisms. In particular, the set of charter provisions that firms use, as measured by the Gompers, Ishii, and Metrick (2003) G Index, is associated with board structure, with the laws of the state in which the firm is incorporated, and with firm and industry characteristics. We also find that some governance structures appear to serve as substitutes. Specifically, firms that have powerful boards (as measured by board independence) also have the greatest number of charter provisions, suggesting that the market for corporate control is less effective as a monitoring mechanism for these firms. In contrast, firms that have less powerful boards tend to have few charter provisions, suggesting that the market for corporate control plays a greater monitoring role at such firms. To address potential endogeneity issues, we employ three-stage least squares analysis to estimate these relationships within a system of equations. Our results from this analysis are consistent with the hypothesis that powerful boards serve as a substitute for the market for corporate control. Finally, our findings suggest that causality runs from the board to the choice of charter provisions, but not vice versa.

Keywords: Corporate Governance, Charter Provisions, Boards of Directors

JEL Classification: G30, G34

Suggested Citation

Gillan, Stuart L. and Hartzell, Jay C. and Starks, Laura T., Tradeoffs in Corporate Governance: Evidence from Board Structures and Charter Provisions (June 2006). Available at SSRN: https://ssrn.com/abstract=917544 or http://dx.doi.org/10.2139/ssrn.917544

Stuart L. Gillan

University of Georgia - Department of Finance ( email )

Terry College of Business
Athens, GA 30602-6253
United States

Jay C. Hartzell (Contact Author)

University of Texas at Austin - Department of Finance ( email )

1 University Station B6600
Austin, TX 78712
United States
512-471-6779 (Phone)
512-471-5073 (Fax)

HOME PAGE: http://www.mccombs.utexas.edu/faculty/jay.hartzell/

Laura T. Starks

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-471-5899 (Phone)
512-471-5073 (Fax)

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