Corporate Governance, Product Market Competition, and Equity Prices


  • Giroud is at the NYU Stern School of Business. Mueller is at the NYU Stern School of Business, NBER, CEPR, and ECGI. We thank Cam Harvey (the Editor), an associate editor, two anonymous referees, and seminar participants at NYU, Yale, Michigan, Illinois, the WFA Meetings in San Diego (2009), and the Harvard Law School/Sloan Foundation Corporate Governance Research Conference (2009) for helpful comments. We are especially grateful to Wei Jiang and Martijn Cremers for providing us with data.


This paper examines whether firms in noncompetitive industries benefit more from good governance than do firms in competitive industries. We find that weak governance firms have lower equity returns, worse operating performance, and lower firm value, but only in noncompetitive industries. When exploring the causes of the inefficiency, we find that weak governance firms have lower labor productivity and higher input costs, and make more value-destroying acquisitions, but, again, only in noncompetitive industries. We also find that weak governance firms in noncompetitive industries are more likely to be targeted by activist hedge funds, suggesting that investors take actions to mitigate the inefficiency.