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The market reaction to corporate governance regulation

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  • Larcker, David F.
  • Ormazabal, Gaizka
  • Taylor, Daniel J.
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    Abstract

    This paper investigates the market reaction to recent legislative and regulatory actions pertaining to corporate governance. The managerial power view of governance suggests that executive pay, the existing process of proxy access, and various governance provisions [e.g., staggered boards and Chief Executive Officer (CEO)-chairman duality] are associated with managerial rent extraction. This perspective predicts that broad government actions that reduce executive pay, increase proxy access, and ban such governance provisions are value-enhancing. In contrast, another view of governance suggests that observed governance choices are the result of value-maximizing contracts between shareholders and management. This perspective predicts that broad government actions that regulate such governance choices are value destroying. Consistent with the latter view, we find that the abnormal returns to recent events relating to corporate governance regulations are, on average, decreasing in CEO pay, decreasing in the number of large blockholders, decreasing in the ease by which small institutional investors can access the proxy process, and decreasing in the presence of a staggered board.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 101 (2011)
    Issue (Month): 2 (August)
    Pages: 431-448

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    Handle: RePEc:eee:jfinec:v:101:y:2011:i:2:p:431-448

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    Web page: http://www.elsevier.com/locate/inca/505576

    Related research

    Keywords: Corporate governance Executive compensation Proxy access Regulation Blockholders;

    References

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    Citations

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    Cited by:
    1. Vincent Anesi & Daniel J. Seidmann, 2011. "Bargaining over an Endogenous Agenda," Discussion Papers 2011-10, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
    2. Larcker, David F. & McCall, Allan L. & Ormazabal, Gaizka, 2012. "The Economic Consequences of Proxy Advisor Say-on-Pay Voting Policies," Research Papers 2105, Stanford University, Graduate School of Business.
    3. Ferri, Fabrizio & Oesch, David, . "Management Influence on Investors: Evidence from Shareholder Votes on the Frequency of Say on Pay," Working Papers on Finance 1329, University of St. Gallen, School of Finance.
    4. Adel Elgharbawy & Magdy Abdel-Kader, 2013. "Enterprise governance and value-based management: a theoretical contingency framework," Journal of Management and Governance, Springer, vol. 17(1), pages 99-129, February.
    5. Vicente Cunat & Mireia Gine & Maria Guadalupe, 2013. "Say Pays! Shareholder Voice and Firm Performance," Upjohn Working Papers and Journal Articles 13-192, W.E. Upjohn Institute for Employment Research.
    6. Ali Akyol & Konrad Raff & Patrick Verwijmeren, 2012. "The Elimination of Broker Voting in Director Elections," Tinbergen Institute Discussion Papers 12-094/IV/DSF38, Tinbergen Institute.
    7. Ricardo Correa & Ugur Lel, 2013. "Say on pay laws, executive compensation, CEO pay slice, and firm value around the world," International Finance Discussion Papers 1084, Board of Governors of the Federal Reserve System (U.S.).
    8. Cohen, Alma & Wang, Charles C.Y., 2013. "How do staggered boards affect shareholder value? Evidence from a natural experiment," Journal of Financial Economics, Elsevier, vol. 110(3), pages 627-641.
    9. Armstrong, Christopher S. & Gow, Ian D. & Larcker, David F., 2012. "The Efficacy of Shareholder Voting: Evidence from Equity Compensation Plans," Research Papers 2097, Stanford University, Graduate School of Business.

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