Essay

Page 1 of 68

Essay

By | Feb. 2013
Page 1 of 68
What Matters in Corporate Governance?
Lucian Bebchuk Harvard Law School and NBER Alma Cohen Tel-Aviv University Department of Economics, NBER, and Harvard Law School Olin Center for Law, Economics, and Business Allen Ferrell Harvard Law School and ECGI

We investigate the relative importance of the twenty-four provisions followed by the Investor Responsibility Research Center (IRRC) and included in the Gompers, Ishii, and Metrick governance index (Gompers, Ishii, and Metrick 2003). 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. (JEL G30, G34, K22)

There is now widespread recognition, as well as growing empirical evidence, that corporate governance arrangements can substantially affect shareholders. But which provisions, among the many provisions firms have and outside observers follow, are the ones that play a key role in the link between corporate governance and firm value? This is the question we investigate in this article. An analysis that seeks to identify which provisions matter should not look at provisions in isolation without controlling for other corporate governance provisions that might also influence firm value. Thus, it is desirable to look at a universe of provisions together. We focus in this article on the universe of For those wishing to use the entrenchment index put forward in this paper in their research, data on firms’ entrenchment index levels is available at http://www.law.harvard.edu/faculty/bebchuk/data.shtml. A list of over...