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Manuscript Type: EmpiricalResearch Question/Issue: This paper examines the relation between internal corporate governance and the market for corporate control by analyzing how firms' internal governance mechanisms are related to states' antitakeover statutes (ATS). Specifically, we test two competing hypotheses concerning the effect of ATS on internal governance: the substitution hypothesis and the complementarity hypothesis. Research Findings/Insights: We provide evidence that is consistent with the complementarity hypothesis that exposure to a possible takeover increases rather than decreases the need for better internal governance mechanisms. Specifically, firms that are exposed to takeover threats (i.e., firms in states without ATS or firms that opt out of states' ATS) have stronger internal governance mechanisms (i.e., adopt a greater number of governance standards) than do firms that are not exposed to takeover threats (i.e., firms in states with ATS). In a similar vein, firms adopt more internal governance standards when states abolish existing ATS. Theoretical/Academic Implications: Although prior research suggests that exposure to takeover threats reduces managerial entrenchment through its disciplinary effect, our study provides evidence that exposure to a possible takeover could exacerbate the managerial myopia problem and that firms mitigate this problem through internal governance mechanisms. The results of the present study suggest that certain governance mechanisms (e.g., state-level ATS) are more effective in addressing the agency problem in the presence of other complementary governance mechanisms (e.g., firm-level governance standards), contributing to the growing literature that calls attention to the importance of viewing various governance mechanisms from a bundle perspective. In addition, our study contributes to the literature with a new identification strategy. Our identification strategy makes use of the fact that firms would not be subject to the same shock from the abolition of ATS if they had already opted out, which enables us to analyze the relation between ATS and internal governance mechanisms more accurately. This identification strategy may benefit future studies that consider state-level changes in ATS to be exogenous shocks. Practitioner/Policy Implications: Our study provides empirical evidence concerning the complex ramifications of states' antitakeover statutes for corporate governance that policymakers and market regulators should consider in their decision-making. The complementarity, particularly between state-level laws and firm-level board functions, may deserve better attention from policymakers, regulators, and corporate managers.

Due to the severity of the Asian Financial Crisis 1997–1998, South Korea, Indonesia, and Thailand resorted to an International Monetary Fund (IMF) bailout. In exchange, the IMF demanded a series of reforms intended to promote rule-based institutions generally found in advanced Western economies, such as the rule of law. Using panel data analysis from 1982 to 2007, we test empirically whether judicial independence, one of the more fundamental rule-based institutions, can positively explain the growth of these countries after the crisis, and find the impact of reforms to be limited. To understand why, we use South Korea as an example to show that top-down reforms by the government prevented a shift towards a rule-based economy. Due to the government selectively bailing out big businesses, big businesses that survived the crisis captured market shares once owned by the dissolved big businesses, becoming too powerful for the government to regulate. This research uses Soifer’s theoretical framework on critical junctures.

Theories on institutional change assert that exogenous shocks are critical in transforming path-dependent institutions. There is not much empiric research, however, that has investigated whether that is indeed the case. To fill this gap, this study investigates the effects of institutional quality on economic growth with a focus on East Asia before and after the 1997-98 Asian financial crisis, which delivered a critical shock in economic activities and institutions in East Asia. Using panel data analysis from 1981 and 2007, I investigate whether the effect of institutional quality on economic growth differed in East Asia compared to rest of the world before the crisis and whether such relationship changed after the crisis. Using two-way fixed effects model, the estimation shows that the effect of institutional quality on economic growth was positive on average for the rest of the world after the crisis but negative for East Asia. The negative coefficient was particularly strong for the three countries—South Korea, Indonesia, and Thailand—that suffered the most during the crisis. However, in the long term, there was no significant change of this negative effect.