The Impact of Internal and External Firm-Level Mechanisms on Corporate Performance During the Financial Market Crisis (2007-08)

Abstract

This paper examines the Firm-Level internal and external control governance mechanisms during the financial market crisis of 2007-08. This study employs two different methods by dividing a portfolio of 136 firms into two samples to examine the effects of both the internal and external control mechanisms. The first sample uses a regression of a normal Ordinary Least Square (OLS) robust standard error and then extending it to include entity effects, time effects and both entity and time effects. In the second sample, we run a binary regression to enable us to predict the probability of survival for each company. Based on both samples, we find a positively significant correlation between the internal firm mechanisms, shareholders wealth maximization proxied by stock return during the financial crisis. The binary regression provides a negatively significant support that with strong and higher external control mechanisms proxied by IRRC anti-takeover provisions, leads to a weak shareholders and, in turn, negatively influence the shareholders wealth proxied by stock return and the probability of surviving during uncertainty.