Working Paper: CEPR ID: DP6446
Authors: Xavier Giroud; Holger M. Mueller
Abstract: By reducing the fear of a hostile takeover, business combination (BC) laws weaken corporate governance and create more opportunity for managerial slack. Using the passage of BC laws as a source of identifying variation, we examine if such laws have a different effect on firms in competitive and non-competitive industries. We find that while firms in non-competitive industries experience a substantial drop in performance, firms in competitive industries experience virtually no effect. Though consistent with the general notion that competition mitigates managerial agency problems, our results are, in particular, supportive of the stronger view expressed by A. Alchian, M. Friedman, and G. Stigler that managerial slack cannot survive in competitive industries. When we examine which agency problem competition mitigates, we find evidence consistent with a ?quiet-life? hypothesis. While capital expenditures are unaffected by the passage of BC laws, input costs, wages, and overhead costs all increase, and only so in non-competitive industries. We also conduct event studies around the dates of the first newspaper reports about the BC laws. We find that while firms in non-competitive industries experience a significant decline in their stock prices, the stock price impact is small and insignificant in competitive industries.
Keywords: corporate governance; product market competition
JEL Codes: G34; L1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| bc laws (K20) | managerial slack (D22) |
| managerial slack (D22) | firm performance (L25) |
| bc laws (K20) | firm performance (L25) |
| Herfindahl Index increase (L19) | firm performance (L25) |
| competition (L13) | managerial agency problems (D82) |
| bc laws (K20) | input costs, wages, and overhead costs (J30) |
| competition (L13) | bc laws effect on firm performance (K20) |
| bc laws (K20) | cumulative abnormal return (CAR) (C22) |