What Matters in Corporate Governance?

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 reductions in firm valuation as well as large negative abnormal returns during the 1990-2003 period. The other eighteen IRRC provisions not in our entrenchment index were uncorrelated with either reduced firm valuation or negative abnormal returns.

The bright side of financial derivatives: Options trading and firm innovation

“…Specifically, the interaction between options volume and managerial entrenchment in column 2 of Table 8 generates a significantly negative coefficient estimate of -0.028 (significant at 5%) while the main effect of Ln(Optvol) remains positive and statistically significant at the 1% level. For robustness purposes, Table A13 in the Appendix investigates the interaction between options trading and the "Entrenchment Index" (E-Index) (Bebchuk, Cohen, and Ferrell, 2009). The findings are similar.…”

“…All regressions control for a full set of three-digit industry dummies, time dummies, and fixed effects by including pre-sample means of the dependent variable as proposed by Blundell, Griffith, and van Reenen (1999). The E-Index is an average of 6 provisions in the firm's charter (see Bebchuk, Cohen, and Ferrell, 2009 patents weighted by the number of forward citations (CITES ) and firms' unweighted patent counts (PATS ) on product market competition (Competition), managerial entrenchment (G-Index ), CEO age, lagged change in profitability (∆ ROA t−1 ), stock-based compensation (CEO vega and CEO delta) and other firm-level control variables. Firms in columns: 285.…”

The impact of corporate governance practices on R&D efforts: a look at shareholders' rights, cross-listing, and control pyramid

“…The possible existence of complementarity casts doubt particularly on previous results which emphasized the existence of a hierarchy among practices without checking for H3 (e.g. Bebchuk et al, 2009). In other words, H3 may hold without H1 being validated.…”

“…In this context, when the practices implemented on the market for corporate control fail to provide adequate control, other governance practices such as board practices or compensation schemes are added by shareholders to achieve greater and balanced control (Agrawal and Knoeber, 1996). According to recent empirical results (Cremers and Nair, 2005;Bebchuk et al, 2009), certain entrenchment provisions (voting power, poison pills, and golden parachutes) are found to be more damaging than others in achieving long term performance and their eradication should yield higher net returns. Multiple practices are, however, difficult to consider at the same time and are thus often synthesized in the literature with indexes (La Porta et al, 1998;Gompers et al, 2003;Bebchuk et al, 2005), approximating the measure of intensity of alignment using the number of shareholder-oriented governance practices implemented.…”

CEO Tenure and Risk-Taking

“…Results are similar if we define the high entrenchment dummy based on the E-index, which measures the number of the six most important anti-takeover provisions at the firm level (Bebchuk et al, 2009). The results are also similar if we use the presence of a classified board as an indicator of managerial power (Bebchuk & Cohen, 2005).…”