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Does Corporate Governance Matter in Competitive Industries?

  • Xavier Giroud
  • Holger M. Mueller
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    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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    File URL: http://www.nber.org/papers/w14877.pdf
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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14877.

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    Date of creation: Apr 2009
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    Publication status: published as Does Corporate Governance Matter in Competitive Industries?, with H. Mueller, Journal of Financial Economics, 2010
    Handle: RePEc:nbr:nberwo:14877
    Note: CF
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