Corporate Governance, Product Market Competition and Equity Prices

Posted: 21 Apr 2010

See all articles by Holger M. Mueller

Holger M. Mueller

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

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Date Written: April 21, 2010

Abstract

This paper examines whether firms in non-competitive industries benefit relatively more from good governance than do firms in competitive industries. Consistent with this hypothesis, we find that weak governance firms, as measured by the G-index, have lower equity returns, worse operating performance, and lower firm value, but only so in non-competitive industries. When we examine the nature of the underlying agency cost, we find that weak governance firms have lower labor productivity, higher input costs, and make more value-destroying acquisitions, but, again, only so in non-competitive industries. We also find that weak governance firms in non-competitive industries are more likely to be targeted by activist hedge funds, suggesting that investors are taking actions to mitigate the inefficiency.

Keywords: Corporate Governance, Product Market Competition

JEL Classification: G34

Suggested Citation

Mueller, Holger M., Corporate Governance, Product Market Competition and Equity Prices (April 21, 2010). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1593671

Holger M. Mueller (Contact Author)

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