Concentrating on Governance

Abstract

This paper develops a novel trade-off view of corporate governance. Using a model that integrates agency costs and bargaining benefits of management-friendly provisions, we identify the economic determinants of the resulting trade-offs for shareholder value. Consistent with the theory, our empirical analysis shows that provisions that allow managers to delay takeovers have significant bargaining effects and a positive relation with shareholder value in concentrated industries. By contrast, non-delay provisions have an unambiguously negative relation with value, particularly in concentrated industries. Our analysis suggests that there are governance trade-offs for shareholders and that industry concentration is an important determinant of their severity.THE IMPORTANCE OF CORPORATE governance has long been recognized among financial economists, institutional investors, and practitioners, as well as policy makers. However, as Shleifer and Vishny (1997, p. 737) note, "even in advanced market economies, there is a great deal of disagreement on how good or bad the existing governance mechanisms are." To further our understanding of existing governance mechanisms, this paper takes a novel approach. We develop a unified account of the costs and benefits of external governance and explore the economic determinants of the resulting trade-offs for shareholder value. Our novel perspective explains shareholder governance trade-offs, why they arise, and how they vary across firms and industries.A recent literature starting with Gompers, Ishii, and Metrick (2003) focuses on external governance mechanisms and documents evidence consistent with * Kadyrzhanova is at the University of Maryland and Rhodes-Kropf is at Harvard Business School. For helpful comments and suggestions, we thank Campbell Harvey (the Editor), an anonymous referee,

Governance and CEO Turnover: Do Something or Do the Right Thing?

“…In a similar vein Kadyrzhanova and Rhodes-Kropf (2010) show when firms with more antitakeover statues are able to obtain higher takeover premium. However, these same provisions may cause the firm to be less well run in other ways.…”

The bonding hypothesis of takeover defenses: Evidence from IPO firms

“…Kadyrzhanova and Rhodes-Kropf (2011) argue that bargaining enhancements, such as takeover defenses, are particularly valuable when more value is at stake, and they use industry concentration to proxy for the importance of bargaining power. The presence of a large customer, supplier, or strategic partner could indicate that the IPO firm has a high value that makes increased bargaining power more important.…”

Cash Holdings, Corporate Governance and Acquirer Returns

“…Further, Giroud and Mueller (2010) argue that product market competition interacts with a firm's takeover vulnerability. Kadyrzhanova and Rhodes-Kropf (2011) find that delay provisions are associated with higher target premiums for firms in non-competitive industries, but not for those in competitive industries. Giroud and Mueller (2011) also show that ATPs are associated with lower stock returns, worse operating performance, lower bidder returns, and lower firm value for firms in non-competitive rather than competitive industries.…”

“…Using the passage of the Business Combination (BC) law as an exogenous shock to governance, Giroud and Mueller (2010) finds that the law adversely affected operating performance and stock market responses only for firms in non-competitive industries. Similarly, Kadyrzhanova and Rhodes-Kropf (2011) note that the types of ATPs interact with industry characteristics in determining the target premium, the deterrence effect, and firm value. Cremers and Nair (2005) show that a governance index-based trading strategy produces abnormal returns only when public pension funds or large blockholders have a higher ownership stake.…”