Corporate Governance and Firm Performance: Evidence from Large Governance Changes

Abstract

We study the relationship between governance changes and firm characteristics and the impact of governance changes on future firm performance using a sample of firms that make large positive and large negative changes in thirteen governance measures. We find that the governance changes are driven by a movement towards mean industry governance levels and merger pressure, and are related to changes in the firm's observable characteristics. For each governance measure, we examine the future performance of the sample of firms with a large increase in the governance measure and the future performance of the sample of firms with a large decrease in the governance measure. We find that both positive and negative governance changes lead to statistically significant performance changes. However, we find that there is no significant difference in performance between the large positive governance change and the large negative governance change samples. We conclude that the observed changes in governance are consistent with the notion that firms are in equilibrium with respect to their governance structures. These findings are robust to: alternate definitions of firm performance, a large sample of firms over eleven years, and alternate definitions of large governance changes.