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Concentrating on Governance




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    • Kadyrzhanova is at the University of Maryland and Rhodes-Kropf is at Harvard Business School. For helpful comments and suggestions, we thank Campbell Harvey (the Editor), an anonymous referee, Heitor Almeida, Yakov Amihud, Lucian Bebchuk, Dirk Bergemann, Patrick Bolton, Anna Bordon, James Brickley, Matthew Clayton, Steve Drucker, Richard Ericson, Antonio Falato, Laura Field, Stuart Gillan, Maria Guadalupe, Laurie Hodrick, Wei Jiang, Kose John, Steve Kaplan, Pete Kyle, Vojislav Maksimovic, Thomas Moeller, Daniel Paravisini, Francisco Perez-Gonzalez, Gordon Phillips, Nagpurnanand Prabhala, Avri Ravid, Michael Riordan, Bernard Salanie, Tano Santos, Till von Wachter, David Weinstein, Daniel Wolfenzon, Jerold Zimmerman, and seminar participants at Columbia University, Harvard Business School, INSEAD, London Business School, London School of Economics, McGill University, NYU, University of Maryland, University of Michigan, University of North Carolina, University of Notre Dame, University of Pittsburgh, University of Rochester, the 2008 Conference on Corporate Governance at Drexel University, the 2007 AFA meetings in Chicago, the 2007 Washington University Conference on Corporate Finance, and 2006 Batten Conference (William and Mary). An earlier draft of this paper was circulated under the title “Does Governance Pay, or Is Entrenchment the Way? Merger Gains and Antitakeover Provisions.” All remaining errors are ours.


This paper develops a novel trade-off view of corporate governance. Using a model that integrates agency costs and bargaining benefits of management-friendly provisions, we identify the economic determinants of the resulting trade-offs for shareholder value. Consistent with the theory, our empirical analysis shows that provisions that allow managers to delay takeovers have significant bargaining effects and a positive relation with shareholder value in concentrated industries. By contrast, non-delay provisions have an unambiguously negative relation with value, particularly in concentrated industries. Our analysis suggests that there are governance trade-offs for shareholders and that industry concentration is an important determinant of their severity.