NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Does Corporate Governance Matter in Competitive Industries?

Xavier Giroud, Holger M. Mueller

NBER Working Paper No. 14877
Issued in April 2009
NBER Program(s):   CF

By reducing the threat of a hostile takeover, business combination (BC) laws weaken corporate governance and increase the opportunity for managerial slack. Consistent with the notion that competition mitigates managerial slack, we find that while firms in non-competitive industries experience a significant drop in operating performance after the laws' passage, firms in competitive industries experience no significant effect. When we examine which agency problem competition mitigates, we find evidence in support of a "quiet-life" hypothesis. Input costs, wages, and overhead costs all increase after the laws' passage, and only so in non-competitive industries. Similarly, when we conduct event studies around the dates of the first newspaper reports about the BC laws, we find that while firms in non-competitive industries experience a significant stock price decline, firms in competitive industries experience a small and insignificant stock price impact.

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Document Object Identifier (DOI): 10.3386/w14877

Published: Does Corporate Governance Matter in Competitive Industries?, with H. Mueller, Journal of Financial Economics, 2010

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