Abstract:We investigate the relative importance of the 24 provisions followed by the Investor Responsibility Research Center (IRRC) and included in the Gompers, Ishii and Metrick (2003) governance index. We put forward an entrenchment index based on six provisions: staggered boards, limits to shareholder bylaw amendments, poison pills, golden parachutes, and supermajority requirements for mergers and charter amendments. We find that increases in the index level are monotonically associated with economically significant… Show more
“…lucky grants are correlated with high entrenchment levels, our study contributes to (and is consistent with) the studies finding that entrenchment and weak shareholder rights are associated with lower firm value as well as sub-optimal decisions on certain issues (see, e.g., Gompers, Ishii, and Metrick (2003), Bebchuk, Cohen, and Ferrell (2004), and Masulis, Wang, and Xie (2006)). …”
Section: Introductionsupporting
confidence: 89%
“…The second column is similar to the first column except that we add to the regression the firm's level of entrenchment as measured by the entrenchment index of Bebchuk, Cohen, and Ferrell (2004). This index is based on six provisions that operate to protect insiders from the risk of being removed.…”
Section: Governancementioning
confidence: 99%
“…High Entrenchment Index is a dummy equal to one if the Entrenchment Index of the firm is three or more and zero otherwise. Entrenchment Index consists of six anti-takeover provisions and is computed according to Bebchuk, Cohen and Ferrell (2004). Fractional ownership by public pension funds is from the 13f filings.…”
Section: Distribution Of Grants By Outside Directorsmentioning
While prior empirical work and much public attention have focused on the opportunistic timing of executives' grants, we provide in this paper evidence that outside directors' option grants have also been favorably timed to an extent that cannot be fully explained by sheer luck. Examining events in which public firms granted options to outside directors during 1996-2005, we find that 9% were "lucky grant events" falling on days with a stock price equal to a monthly low. We estimate that about 800 lucky grant events owed their status to opportunistic timing, and that about 460 firms and 1400 outside directors were associated with grant events produced by such timing. There is evidence that the opportunistic timing of director grant events has been to a substantial extent the product of backdating and not merely spring-loading based on private information. We find that directors' luck has been correlated with executives' luck. Furthermore, grant events were more likely to be lucky when the firm had more entrenching provisions protecting insiders from the risk of removal, as well as when the board did not have a majority of independent directors.
“…lucky grants are correlated with high entrenchment levels, our study contributes to (and is consistent with) the studies finding that entrenchment and weak shareholder rights are associated with lower firm value as well as sub-optimal decisions on certain issues (see, e.g., Gompers, Ishii, and Metrick (2003), Bebchuk, Cohen, and Ferrell (2004), and Masulis, Wang, and Xie (2006)). …”
Section: Introductionsupporting
confidence: 89%
“…The second column is similar to the first column except that we add to the regression the firm's level of entrenchment as measured by the entrenchment index of Bebchuk, Cohen, and Ferrell (2004). This index is based on six provisions that operate to protect insiders from the risk of being removed.…”
Section: Governancementioning
confidence: 99%
“…High Entrenchment Index is a dummy equal to one if the Entrenchment Index of the firm is three or more and zero otherwise. Entrenchment Index consists of six anti-takeover provisions and is computed according to Bebchuk, Cohen and Ferrell (2004). Fractional ownership by public pension funds is from the 13f filings.…”
Section: Distribution Of Grants By Outside Directorsmentioning
While prior empirical work and much public attention have focused on the opportunistic timing of executives' grants, we provide in this paper evidence that outside directors' option grants have also been favorably timed to an extent that cannot be fully explained by sheer luck. Examining events in which public firms granted options to outside directors during 1996-2005, we find that 9% were "lucky grant events" falling on days with a stock price equal to a monthly low. We estimate that about 800 lucky grant events owed their status to opportunistic timing, and that about 460 firms and 1400 outside directors were associated with grant events produced by such timing. There is evidence that the opportunistic timing of director grant events has been to a substantial extent the product of backdating and not merely spring-loading based on private information. We find that directors' luck has been correlated with executives' luck. Furthermore, grant events were more likely to be lucky when the firm had more entrenching provisions protecting insiders from the risk of removal, as well as when the board did not have a majority of independent directors.
“…Many papers have attempted to refine, explain, or undermine the Gompers, Ishii, Metrick results. (e.g., Bebchuk, Cohen, and Ferrell, 2004;Chi, 2005;Cremers and Nair, 2005;Core, Guay, and Rusticus, 2006). For 4.…”
Section: Treatment Effects Frameworkmentioning
confidence: 99%
“…Many other governance topics have been examined, including the effect of independent directors on value (see studies reviewed in Bhagat and Black, 2002) and the effect of board of director size on firm value (see studies reviewed in Eisenberg, Sundgren, and Wells, 1998 Core, Guay, and Rusticus (2006) show that the GIM results cannot be attributed to incorrect investor expectations of the performance of wellgoverned firms, while Bebchuk, Cohen, and Ferrell (2004) argue that the bulk of the governance effects found in GIM can be attributed to just a few governance variables, including staggered boards and poison pills.…”
Empirical studies of corporate governance address potential endogeneity problems, but fail to place endogeneity in the context of a model and ignore the possibility of disparate treatment effects across companies. This paper tackles these defects. The model and analysis in the paper demonstrate that: (1) Valid and positive estimates for the effect of governance can only arise if there is random variation in governance and governance is systematically underproduced, or governance is chosen randomly without bias and the randomness under study concerns a subpopulation with below-average governance.(2) Governance models that correct for endogeneity using subsamples of firms, fixed effects, or instrumental variables estimates focus on subpopulations of companies that may have different responses to a governance treatment than the average firm. (JEL K22, G34)
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