RFS Advance Access originally published online on November 27, 2008
Review of Financial Studies 2009 22(2):783-827; doi:10.1093/rfs/hhn099
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What Matters in Corporate Governance?
Harvard Law School and NBER
Tel-Aviv University Department of Economics, NBER, and Harvard Law School Olin Center for Law, Economics, and Business
Harvard Law School and ECGI
Send correspondence to Lucian Bebchuk, Harvard Law School, Cambridge, MA 02138; telephone: (617) 495-3138; fax: (617) 812-0554; E-mail: bebchuk{at}law.harvard.edu.
JEL Classification: G30, G34, K22
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Abstract |
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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.
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 seventy-five studies already using the index is available at http://www.law.harvard.edu/faculty/bebchuk/studies.shtml. For helpful suggestions and discussions, we are grateful to Bernie Black, Victor Chernozhukov, Martijn Cremers, Ray Fisman, Yaniv Grinstein, Robert Marquez, Andrew Metrick, Guhan Subramanian, Greg Taxin, Manuel Trajtenberg, Yishay Yafeh, Rose Zhao, Michael Weisbach (the editor), an anonymous referee, and conference participants at the NBER, Washington University, the Oxford Saïd Business School, Tel-Aviv University, the Bank of Israel, and the ALEA annual meeting. Our work benefited from the financial support of the Nathan Cummins Foundation; the Guggenheim Foundation; the Harvard Law School John M. Olin Center for Law, Economics, and Business; the Harvard Milton fund; and the Harvard Program on Corporate Governance.