Product Market Competition, Corporate Governance, and Firm Value: Evidence from the EU Area


  • We are grateful to an anonymous referee, Christine Csibi, John Doukas (the editor), Sadok El Ghoul, Michel Habib, Daniel Hoechle, Markus Schimmer, Paul Söderlind, and seminar participants at the University of St. Gallen, the University of Zurich, and the 2010 Financial Management Association European Conference in Hamburg, Germany for useful comments. Financial support by the Swiss National Science Foundation is gratefully acknowledged.


This paper investigates whether the valuation effect of corporate governance depends on the degree of competition in the companies’ product markets in a large international sample covering 14 countries from the European Union (EU). Besides providing external validity of previous US-centred studies, this paper uses more comprehensive and reliable measures of both product market competition and corporate governance. Consistent with the hypothesis that product market competition acts as a substitute for corporate governance as competitive pressure imposes discipline on managers to maximise firm value, our results show that corporate governance significantly increases firm value in non-competitive industries only. When investigating the channels through which firm value may be increased, we find that good governance for firms in non-competitive industries leads them to have more capital expenditures, spend less on acquisitions, and be less likely to diversify. Our results are robust to a large number of robustness checks including the use of alternative measures of competition and governance, as well as using alternative regression specifications.