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The Market Reaction to Corporate Governance Regulation

Author

Listed:
  • Larcker, David F.

    (Stanford University)

  • Ormazabal, Gaizka

    (Stanford University)

  • Taylor, Daniel J.

    (University of Pennsylvania)

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 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 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 presence of a staggered board.

Suggested Citation

  • Larcker, David F. & Ormazabal, Gaizka & Taylor, Daniel J., 2010. "The Market Reaction to Corporate Governance Regulation," Research Papers 2059, Stanford University, Graduate School of Business.
  • Handle: RePEc:ecl:stabus:2059
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    File URL: http://gsbapps.stanford.edu/researchpapers/library/RP2059%20&%2082.pdf
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • K20 - Law and Economics - - Regulation and Business Law - - - General
    • L50 - Industrial Organization - - Regulation and Industrial Policy - - - General

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