When does Competition Mitigate Agency Problems?

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Working Paper

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This paper examines empirically how the performance correlation of firms within an industry affects the degree to which product market competition mitigates agency problems. Using the passage of state anti-takeover laws as a source of identifying exogenous variation in corporate governance, I find that in homogeneous industries the effect of business combination (BC) laws on firms’ operating performance varies inversely with the level of competition, while in heterogeneous industries all firms experience a decline in operating performance, not varying with industry competition. I find similar results on stock prices when examining the stock market reactions of the first newspaper reports of BC laws. My results are also robust to the use of firm-level corporate governance measures (e.g. G-index). This study contributes to the literature by providing empirical evidence on the channel through which competition acts as a disciplinary mechanism.


Corporate governance, product market competition, industry homogeneity, anti-takeover laws


Finance and Financial Management

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