Working Paper: NBER ID: w14877
Authors: Xavier Giroud; Holger M. Mueller
Abstract: By reducing the threat of a hostile takeover, business combination (BC) laws weaken corporate governance and increase the opportunity for managerial slack. Consistent with the notion that competition mitigates managerial slack, we find that while firms in non-competitive industries experience a significant drop in operating performance after the laws' passage, firms in competitive industries experience no significant effect. When we examine which agency problem competition mitigates, we find evidence in support of a "quiet-life" hypothesis. Input costs, wages, and overhead costs all increase after the laws' passage, and only so in non-competitive industries. Similarly, when we 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 stock price decline, firms in competitive industries experience a small and insignificant stock price impact.
Keywords: Corporate Governance; Managerial Slack; Business Combination Laws; Competition
JEL Codes: G3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Competition (L13) | Managerial slack (D22) |
| Passage of BC laws (N42) | Managerial slack (D22) |
| Competition (low HHI) (L13) | Managerial slack (D22) |
| Passage of BC laws (N42) | Return on Assets (ROA) (G31) |
| Passage of BC laws (N42) | Input costs (D24) |
| Passage of BC laws (N42) | Wages (J31) |
| Passage of BC laws (N42) | Overhead costs (L29) |
| Passage of BC laws (N42) | Stock price reactions (G19) |