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

Author

Listed:
  • Vidhi Chhaochharia

    (University of Miami, Coral Gables, Florida 33124)

  • Yaniv Grinstein

    (Interdisciplinary Center Herzliya, 46150 Herzliya, Israel; Cornell University, Ithaca, New York 14853)

  • Gustavo Grullon

    (Rice University, Houston, Texas 77252)

  • Roni Michaely

    (Johnson Graduate School of Management, Cornell-Tech, Cornell University, New York, New York 10011)

Abstract

We use the Sarbanes–Oxley Act of 2002 (SOX) as a quasi-natural experiment to examine the link between product market competition and internal governance mechanisms. Consistent with the notion that competition plays an important role in aligning incentives within the firm, SOX has led to a larger improvement in the operation of firms in concentrated industries than in nonconcentrated industries. Furthermore, 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 United States and abroad. Overall, our results indicate that corporate governance is more important when firms face less product market competition.

Suggested Citation

  • Vidhi Chhaochharia & Yaniv Grinstein & Gustavo Grullon & Roni Michaely, 2017. "Product Market Competition and Internal Governance: Evidence from the Sarbanes–Oxley Act," Management Science, INFORMS, vol. 63(5), pages 1405-1424, May.
    • Handle: RePEc:inm:ormnsc:v:63:y:2017:i:5:p:1405-1424
    DOI: 10.1287/mnsc.2015.2409
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