Zohar Goshen is the Jerome L. Greene Professor of Transactional Law at Columbia Law School and Doron Levit is Assistant Professor of Finance at The Wharton School of the University of Pennsylvania. This post is based on their recent paper.
The central theme in the theory of corporate governance is that allocating more control rights to shareholders will allow them to hold disloyal managers accountable and reduce agency costs. The common empirical prediction that follows is that a weak governance structure will be associated with weak firm value and performance due to high agency costs. However, a review of empirical studies of the last forty years reveals that every aspect of corporate governance that was studied yielded conflicting empirical findings as to its effect on firm value and performance. For instance: the level of cash flow rights held by management; dual-class firms; anti-takeover defenses, such as poison pills, staggered boards, and protective state legislations; hedge-fund activism; and the strength of corporate governance as measured by several indices.
Interestingly, despite the inconclusive empirical evidence, institutional investors with common ownership are consistently pushing toward strong governance structure for publicly traded firms, via, for instance, destaggering boards, limiting the use of poison pills, excluding dual-class firms from the indices, demanding mandatory sunsets for dual-class firms, and supporting hedge funds’ governance initiatives.
