Does Corporate Governance Matter in Competitive Industries? Xavier Giroud and Holger M. Mueller NBER Working Paper No. 14877 April 2009 JEL No. G3 Abstract: Business combination (BC) laws weaken corporate governance and increase managerial slack by reducing the threat of hostile takeovers. Using exogenous variation in BC laws passed between 1985 and 1991, the authors find that firms in non-competitive industries experience a significant drop in operating performance, while firms in competitive industries show no significant effect. The results support a "quiet-life" hypothesis, where managerial slack increases in non-competitive industries but not in highly competitive ones, where competitive pressure enforces discipline. The study also finds that input costs, wages, and overhead costs increase only in non-competitive industries after BC laws are passed. Event studies show that stock prices decline significantly in non-competitive industries but not in competitive ones. The findings suggest that competition mitigates managerial slack, but the specific agency problem mitigated is not clear. The study also finds no evidence of managerial empire building, and that changes in ROA are not necessarily due to changes in operating profitability but may reflect changes in earnings management or asset mix. The results are robust across various specifications and measures of competition.Does Corporate Governance Matter in Competitive Industries? Xavier Giroud and Holger M. Mueller NBER Working Paper No. 14877 April 2009 JEL No. G3 Abstract: Business combination (BC) laws weaken corporate governance and increase managerial slack by reducing the threat of hostile takeovers. Using exogenous variation in BC laws passed between 1985 and 1991, the authors find that firms in non-competitive industries experience a significant drop in operating performance, while firms in competitive industries show no significant effect. The results support a "quiet-life" hypothesis, where managerial slack increases in non-competitive industries but not in highly competitive ones, where competitive pressure enforces discipline. The study also finds that input costs, wages, and overhead costs increase only in non-competitive industries after BC laws are passed. Event studies show that stock prices decline significantly in non-competitive industries but not in competitive ones. The findings suggest that competition mitigates managerial slack, but the specific agency problem mitigated is not clear. The study also finds no evidence of managerial empire building, and that changes in ROA are not necessarily due to changes in operating profitability but may reflect changes in earnings management or asset mix. The results are robust across various specifications and measures of competition.