Corporate Governance, Product Market Competition, and Equity Prices

Abstract

This paper examines the hypothesis that firms in competitive industries should benefit relatively less from good governance, while firms in non-competitive industries-where lack of competitive pressure fails to enforce discipline on managers-should benefit relatively more.Whether we look at the effects of governance on long-horizon stock returns, firm value, or operating performance, we consistently find the same pattern: The effect is monotonic in the degree of competition, it is small and insignificant in competitive industries, and it is large and significant in non-competitive industries. By implication, the effect of governance (in non-competitive industries) reported in this paper is stronger than what has been previously reported in Gompers, Ishii, and Metrick (2003, "GIM") and subsequent work, who document the average effect across all industries. For instance, GIM's hedge portfolio-provided it only includes firms in non-competitive industries-earns a monthly alpha of 1.47%, which is twice as large as the alpha reported in GIM. The alpha remains large and significant even if the sample period is extended until 2006. We also revisit the argument that investors in the 1990s anticipated the effect of governance, implying that the alpha earned by GIM's hedge portfolio is likely due to an omitted risk factor. We find that while investors were indeed not surprised on average, they underestimated the effect of governance in non-competitive industries, the very industries in which governance has a significant effect in the first place.

Horizontal and Vertical Firm Networks, Corporate Performance and Product Market Competition

“…Giroud and Mueller (2011) find that firms with weak governance, as measured by various antitakeover and shareholder rights provisions, face lower performance and firm value if competition in the industry is weak.…”

Endogenous governance transparency and product market competition

“…By contrast, firms in highly competitive industries experience no significant effect, so managerial slack appears to increase only in non-competitive industries. In a subsequent paper, using the democracy-dictatorship hedge portfolio in Gompers et al (2003), Giroud and Mueller (2011) find that the effect of governance on firms' operating performance, long-horizon stock returns or firm value is relatively small in competitive industries compared to non-competitive industries, where governance matters more. Likewise, Guadalupe and Pérez-González (2006) find that product market competition is strongly negative correlated with private benefits of control.…”

Family Firms and Financial Analyst Activity

“…To examine the relationship between ownership structure and analysts' forecast errors, I follow Giroud andMueller (2011) andChang et al (2000) and estimate the following regression: . 18 The second option strongly decreases the number of observations.…”