Corporate governance and product market competition: evidence from import tariff reductions
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Corporate governance and product market competition: evidence from import tariff reductions David Gempesaw1
© Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract Using large reductions in import tariffs as an exogenous shock to the competitive environment, this paper examines how an increase in foreign competition affects the importance of corporate governance. Consistent with prior studies, weak governance is associated with lower firm value, lower operating performance, lower labor productivity, higher capital expenditures, higher non-production expenses, and higher wages in the absence of increased competition. However, the differences between weak and strong governance firms along each of these dimensions are reduced or eliminated after a tariff cut. The effects are concentrated among firms in previously noncompetitive industries, defined as having sales concentration above the median or import penetration below the median in the year before the tariff cut. These conclusions are supported through the use of multiple alternative measures of operating performance and corporate governance. Altogether, the evidence indicates that an increase in competition can mitigate agency costs and serve as a substitute for traditional corporate governance mechanisms. Keywords Corporate governance · Product market competition · Agency cost · Firm value · Operating performance · Import tariff reductions JEL Classification G15 · G32 · G34
1 Introduction It has been well established that corporate governance and product market competition can each act as a disciplinary device for managers. Yet, the nature of the interaction between governance and competition may not be as clear. On the one hand, increased competition I am grateful to the editor Cheng-Few Lee and two anonymous referees for insightful comments and suggestions which significantly improved the quality of this paper. Electronic supplementary material The online version of this article (https://doi.org/10.1007/s1115 6-020-00931-8) contains supplementary material, which is available to authorized users. * David Gempesaw [email protected] 1
Farmer School of Business, Miami University, Oxford, OH, USA
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can motivate managers to work harder, thereby lessening the need for strong governance. On the other hand, if weaker governance impairs shareholders’ ability to ensure managerial effort, then competition can act as a complement and exacerbate the negative effects of entrenchment. With weak corporate governance, managers who are protected from external discipline may not respond appropriately to competitive pressures. In this case, an increase in competition can make the effects of agency problems created by weak governance even more severe. This paper investigates the empirical relationship between governance and competition by identifying how an increase in competitive pressure affects the importance of corporate governance. The identification strategy is based upon a quasi-natural experiment cen
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