What Matters in Corporate Governance? Lucian A. Bebchuk, Alma Cohen, and Allen Ferrell (2004) investigate the relative importance of 24 corporate governance provisions tracked by the Investor Responsibility Research Center (IRRC), including those in the Gompers, Ishii, and Metrick (2003) governance index. They construct an "entrenchment index" based on six provisions: staggered boards, limits to shareholder bylaw amendments, poison pills, golden parachutes, and supermajority requirements for mergers and charter amendments. They find that increases in the entrenchment index are monotonically associated with economically significant reductions in firm valuation and large negative abnormal returns during 1990–2003. The other 18 IRRC provisions are uncorrelated with reduced firm valuation or negative abnormal returns. The authors argue that the six entrenching provisions largely drive the documented negative correlation between IRRC provisions and firm valuation since 1990. They also find that the entrenching provisions are correlated with reduced stock returns during the 1990–1999 and 1990–2003 periods. A strategy of buying firms with low entrenchment scores and selling short firms with high scores would have yielded substantial abnormal returns. The authors conclude that the six entrenching provisions in the entrenchment index largely drive the documented negative correlation between IRRC provisions and firm valuation and stockholder returns since 1990. They also argue that the entrenchment index provides a more accurate measure of corporate governance quality than the GIM index, which includes the 18 provisions not in the entrenchment index. The authors suggest that shareholder advisory firms should focus on a small number of key provisions rather than attempting to count all governance provisions.What Matters in Corporate Governance? Lucian A. Bebchuk, Alma Cohen, and Allen Ferrell (2004) investigate the relative importance of 24 corporate governance provisions tracked by the Investor Responsibility Research Center (IRRC), including those in the Gompers, Ishii, and Metrick (2003) governance index. They construct an "entrenchment index" based on six provisions: staggered boards, limits to shareholder bylaw amendments, poison pills, golden parachutes, and supermajority requirements for mergers and charter amendments. They find that increases in the entrenchment index are monotonically associated with economically significant reductions in firm valuation and large negative abnormal returns during 1990–2003. The other 18 IRRC provisions are uncorrelated with reduced firm valuation or negative abnormal returns. The authors argue that the six entrenching provisions largely drive the documented negative correlation between IRRC provisions and firm valuation since 1990. They also find that the entrenching provisions are correlated with reduced stock returns during the 1990–1999 and 1990–2003 periods. A strategy of buying firms with low entrenchment scores and selling short firms with high scores would have yielded substantial abnormal returns. The authors conclude that the six entrenching provisions in the entrenchment index largely drive the documented negative correlation between IRRC provisions and firm valuation and stockholder returns since 1990. They also argue that the entrenchment index provides a more accurate measure of corporate governance quality than the GIM index, which includes the 18 provisions not in the entrenchment index. The authors suggest that shareholder advisory firms should focus on a small number of key provisions rather than attempting to count all governance provisions.