Abstract
We examine the interaction of internal and external firm-level governance mechanisms with industry-specific economic conditions to assess when they best serve current shareholders. We find that external governance (shareholder rights) is most valuable during industry upturns, with no differential benefit during downturns. For internal governance, we find that small boards are incrementally more valuable during upturns but that this result weakens/reverses during downturns, and inconclusive evidence regarding the state dependent value of institutional ownership. Contributions include showing: governance mechanisms have industry economic state dependent values; small boards may not always be optimal; and managers do not capture these inefficiencies through aggressive policy decisions, norexcessive compensation.
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