Product Market Competition, Corporate Governance, and Firm Value: Evidence from the EU Area

Abstract

This paper investigates whether the valuation effect of corporate governance depends on the degree of competition in the companies’ product markets in a large international sample covering 14 countries from the European Union (EU). Besides providing external validity of previous US‐centred studies, this paper uses more comprehensive and reliable measures of both product market competition and corporate governance. Consistent with the hypothesis that product market competition acts as a substitute for corporate governance as competitive pressure imposes discipline on managers to maximise firm value, our results show that corporate governance significantly increases firm value in non‐competitive industries only. When investigating the channels through which firm value may be increased, we find that good governance for firms in non‐competitive industries leads them to have more capital expenditures, spend less on acquisitions, and be less likely to diversify. Our results are robust to a large number of robustness checks including the use of alternative measures of competition and governance, as well as using alternative regression specifications.

CEO power and corporate risk: The impact of market competition and corporate governance

“…Market competition measures the relative market power of a firm. The literature predominantly uses the HHI to measure market concentration (e.g., Ammann, Oesch, & Schmid, 2013;Beiner, Schmid, & Wanzenried, 2011;Chou, Sibilkov, & Wang, 2011;Giroud & Mueller, 2011;Laksmana & Yang, 2015;Tirole, 1988). An industry is categorized as less competitive or concentrated if there are few firms in that industry with large market share.…”

“…The literature on corporate governance mostly uses the G-index of Gompers et al (2003) to measure this property (e.g., Ammann et al, 2013;Chou, Ng, Sibilkov, & Wang, 2011;Ferreira & Laux, 2007;Giroud & Mueller, 2011). Gompers et al (2003)…”

How Does Product Market Competition Interact with Internal Corporate Governance?: Evidence from the Korean Economy*

“…Recently, studies have been conducted to assess the relationship between external and internal corporate governance. One line of inquiry has examined the effects of product market competition on internal corporate governance (Guadalupe and Perez‐Gonzalez, 2005; Karuna, 2010), and the other line of inquiry assesses the effects of interaction between product marketcompetition and internal corporate governance on firm value (Ammann et al. , 2011; Giroud and Mueller, 2011).…”

“…The second part of our paper is a natural extension of the first part and investigates the interactive role of product market competition and internal corporate governance on firm value. Recently, Ammann et al. (2011) and Giroud and Mueller (2011) documented that firms benefit relatively less from good internal corporate governance in competitive industries, whereas better internal corporate governance exerts positive and significant effects on firm value in non‐competitive industries, thereby implying that these two corporate governance mechanisms are substitutes.…”

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

“…Ammann et al (2011) provide supplementary evidence for a substitutive relationship between competition and corporate governance by showing that good governance mechanisms positively affect firm value solely in non-competitive markets. The previous findings suggest that indicators of corporate governance and the strength of competition are substitutes, indicating that competition limits the scope for opportunistic behavior and therefore aligns the interests of management and shareholders (Karuna 2007, Schmidt 1997.…”