This paper examines the extent to which the corporate governance structure of a firm arises endogenously in response to its performance. We demonstrate that following periods of abnormally good performance managers are more likely to call special meetings and to propose and pass governance measures that are contrary to shareholder interests (based on IRRC classification). These results are driven primarily by firms that are characterized as having poor governance according to either the GIM Index or the proportion of activist shareholders. Following these special meeting we find that next quarter performance of the firm is negative. Our results are consistent with an interpretation of shareholder inattention to governance following good firm performance or a desire to reward management for good past performance. Overall our evidence seems more consistent with the former interpretation.A period of good performance, which may have nothing to do with the firm's management, leads to investors trusting management the when they shouldn't, and they pay the price with lower returns in the future. There is a lesson in here somewhere.
Tuesday, 24 May 2011
Are the seeds of bad governance sown in good times?
There is a new NBER Working Paper on this question out. The abstract of the paper, which is by Antoinette Schoar and Ebonya L. Washington - NBER Working Paper No. 1706, reads,