Corporate governance and the stock market reaction to new product ...

Rev Quant Finan Acc (2012) 39:273–291 DOI 10.1007/s11156-011-0248-x ORIGINAL RESEARCH

Corporate governance and the stock market reaction to new product announcements Wen-Chun Lin • Shao-Chi Chang

Published online: 21 July 2011 Ó Springer Science+Business Media, LLC 2011

Abstract This study examines the explanatory power of corporate governance mechanisms on the wealth effect of firms’ new product strategies. We show that board size, board independence, audit committee independence, CEO equity-based pay, analyst following and shareholder rights are all of significance in explaining the variations in the wealth effect of new product introductions. Our results reveal that the new product strategies announced by firms with better corporate governance mechanisms tend to receive higher stock market valuations than those of firms with poorer governance mechanisms. This study provides empirical support for the notion that enhanced governance mechanisms can reduce both agency and information asymmetry problems for firms announcing new products. Keywords

Corporate governance New product introduction Wealth effect

JEL Classification G14 G30

1 Introduction In this study, we set out to explore the impact of corporate governance on the wealth effect of firms’ new product introductions, arguing that corporate governance mechanisms can reduce agency costs and provide certification of the quality of information contained in new product announcements, and propose that new product announcements by firms

W.-C. Lin (&) Department of Finance, College of Management, Providence University, No. 200, Chungchi Road, Taichung, Taiwan e-mail: [email protected] S.-C. Chang Department of Business Administration, College of Management, National Cheng Kung University, No. 1, University Road, Tainan, Taiwan e-mail: [email protected]

123

274

W.-C. Lin, S.-C. Chang

with better corporate governance mechanisms are likely to receive a more positive stock market reaction. New product introductions play a crucial role in developing and maintaining the competitive advantage of a company. Firms that are able to deliver more new products to the market generally create better opportunities for differentiation and competitive advantage. However, new product introductions do not necessarily create firm value, per se, as the development of new products is often risky, with failure rates reaching as high as 60 per cent (Pauwels et al. 2004). In addition, the commercialization of new products does not guarantee financial success, as the additional sales revenues from new products may be insufficient to cover the significant development and launch costs (Chaney et al. 1991). Furthermore, the competitive advantage from new products may quickly disappear, largely as a result of the rapid imitation of such products by competitors, or the effects of short product life cycles. Although prior studies generally document positive stock market reactions to announcements of new product introductions (Woolridge 1988; Kelm et al. 1995; Chen and Ho 1997), considerable variations are found in terms of individual announcing firms. Chen (2008) finds that new product announcements provide only about 58 per cent of US firms with positive abnormal returns, whilst Chen and Ho (1997) report similar evidence for Singaporean firms. Determining why there are discrepancies in how investors perceive and evaluate new products based upon their initial announcements would seem to be of considerable interest to both academics and business professionals alike. This study investigates the issue from the perspective of the impact a firm’s corporate governance mechanisms may have on this. As new product development generally involves greater information asymmetry between managers and external—and potentially adversarial—parties such as investors, analysts, suppliers, employees, unions and competitors, it is difficult for outsiders to make effective valuations of new product announcements. One reason is that new products are usually unique to the developing firms, making it extremely difficult to assess their value based upon observations of the performance of similar products in other comparable firms. Furthermore, information disclosure of new product introductions is not mandatory (Eccles and Kahn 1998), causing disclosure incentives for different firms to be quite diverse: Whilst some firms may provide information on a voluntary basis in order to reduce information asymmetry, other firms may disclose quite specific information to deliberately overstate the value of their products (Eagly et al. 1978; Frost 1997; Koch 2002; Mercer 2004). Thus, outsiders evaluating a new product announcement are not only facing the issue of information asymmetry, but must also attempt to identify the underlying motives of those firms that do voluntarily disclose information. As such, the quality of corporate governance may convey important signals of the underlying motives of new product investments and may provide important certification effects on information that is voluntarily disclosed as well as on new product announcements. Agency problems may further complicate the valuation of new product introductions (Wu 2008); indeed, it has been demonstrated within the prior literature that with the separation of ownership and control, managers may make capital and human resource investment decisions for their private interests at the expense of shareholder wealth (Wei and Zhang 2008). For example, managers cannot hedge their investment risk as easily as risk-neutral shareholders can, who can diversify their risk by holding diversified portfolios. As a result, they may reduce such risks by investing in projects which are less risky, but which also yield lower returns. Another agency issue is that of poorly functioning internal

123

Corporate governance and the stock market reaction

275

control, which Jensen (1993) argues is the reason why R&D investments in many large firms fail to lead to any increase in firm value. Thus, well-functioning corporate governance mechanisms play crucial roles in mitigating agency costs (Claessens et al. 2002; Brunello et al. 2003; Singh and Davidson 2003). Firstly, such mechanisms provide internal and external monitoring which discourages the pursuit of private interests by managers, thereby maintaining management discipline. Several studies find that firms with boards and audit committees that are more independent than otherwise similar firms—where such independence is measured by the number of outside directors—demonstrate less earnings management and higher quality disclosures (Beasley 1996; Fama and Jensen 1983; Gibbs 1993; Klein 2002; Wild 1996). This is because the board of directors is the highest internal control mechanism responsible for monitoring the actions of senior managers. Klein (2002) further states that the structuring of boards with greater independence from the CEO will be more effective in monitoring the corporate financial accounting process. Furthermore, less earnings management is also discernible amongst firms with boards and audit committees which possess greater financial expertise, and which meet more frequently (Xie et al. 2003). Kim et al. (2006) find that firms with an audit committee and/or a larger percentage of outside directors command higher market valuations, arguing that these effects occur because investors place a higher valuation on the same earnings stream for such firms. Other studies suggest that corporate governance mechanisms help to deal with agency problems and the subsequent implementation of efficient investment decisions through aligning the interests of managers and shareholders (Cornett et al. 2003; Gompers et al. 2003; Pantzalis et al. 1998; Luo and Hachiya 2005). This can be achieved through substantial stock concentrations and management stockholdings (Hill and Snell 1988) and effective incentive contracts that include the appropriate compensation of managers relative to the performance of the firm—such as through equity-based compensation plans (Bizjak et al.1993; Coles et al. 2001). These mechanisms are effective as they cause the personal wealth of a CEO to be increasingly dependent on the value of the firm. For example, if compensation plans place significant emphasis on short-term stock returns, and little or no emphasis on future performance, managers may exhibit prejudiced behavior towards either over- or under-investment, while by implementing the above corporate government mechanisms the CEO will have less incentive to pursue investments in projects which do not increase shareholder value. Prior studies argue that corporate governance is an important consideration in corporate investment, including mergers and acquisitions (Agrawal and Mandelker 1987; Datta et al. 2001), corporate diversification (Hill and Snell 1988; Denis et al. 1997; Anderson et al. 2000) and firm restructuring (Gibbs 1993; Hoskisson et al. 1994). However, to the best of our knowledge, no previous study has investigated the influence of corporate governance on the reaction by the stock market to new product introductions. We therefore examine the relationship between corporate governance mechanisms (specifically board size and independence, audit committee independence, CEO equity-based compensation, analysts’ following, and shareholder rights) and the announcement effects on stock prices of announcing firms using a sample of new products announcements by US firms. The remainder of this paper is organized as follows: Sect. 2 provides the development of our hypotheses. The sample selection and variable measure are presented in Sect. 3, followed in Sect. 4 by the analysis of our empirical results. Finally, the conclusions drawn from this study are discussed in the closing section.

123

276


2 Hypothesis development According to agency theory, boards of directors exist to ensure that shareholder interests are appropriately pursued and to monitor managers on behalf of shareholders. This is necessary because the relationships between managers and shareholders with regard to the organizational processes and outcomes are fundamentally different (Daily et al. 2003; Jensen and Meckling 1976). While ordinary shareholders may be considered risk neutral, as they can diversify their risks through their portfolios (Wiseman and Gomez-Mejia 1998), managers are more likely to be risk-averse, as they cannot diversify their risks so easily. For example, in terms of innovations, failures will not only reduce a firm’s shortterm performance and thereby lower management compensation, but they can also damage the reputation of the executives involved and thereby increase their risk of unemployment. To counter such risk aversion, stakeholders may be heavily reliant on corporate governance mechanisms, using monitoring or incentives to align their risk differentials. However, whilst increased monitoring can, to some degree, help to resolve agency conflicts, its effectiveness is also limited by potential information asymmetry. In this study, we examine specific governance mechanism characteristics, discussing the relationship between the monitoring and information certification effects of governance and the stock market reaction to new product introductions. 2.1 Board size A corporate board improves the performance of a firm by monitoring the quality of managerial decisions and providing specialized resources (Monks and Minow 1995). The effect of board size on firm performance is, however, inconclusive. A larger board is valuable for the breadth of its services, and often shows that a firm has directors from a wide variety of backgrounds (Chaganti et al. 1985). Furthermore, since innovation projects usually involve greater uncertainty in the development and commercialization stages, the wider range of knowledge and services offered by a larger board could be of considerable benefit in guiding investment decisions. Nevertheless, Lipton and Lorsch (1992) and Jensen (1993) argue that large boards are more difficult to coordinate, and can be less effective as a controlling body, whilst Yermack (1996) and Lee and Lee (2009) also argues that board size is inversely related with firm value. Thus, as the impact of board size on the reaction by the stock market to new product introductions remains ambiguous, we propose the following two alternative hypotheses: Hypothesis 1a: board size is positively associated with stock market reaction to new product introductions. Hypothesis 1b: board size is negatively associated with stock market reaction to new product introductions. 2.2 Board independence The second corporate mechanism we examine in this study is board independence. Not only do independent directors provide professional expertise, but they can also independently oversee and monitor senior management. Therefore, it is argued in numerous studies that the effectiveness of corporate governance is positively associated with board independence. For example, both Fama (1980) and Fama and Jensen (1983) argue that independent boards are more likely to make decisions that are consistent with the maximization of shareholder wealth. Weisbach (1988) and Lee and Lee (2009) suggests that a board

123


277

which is dominated by independent directors is more likely to respond to poor performance by dismissing the CEO;. Weisbach (1993) goes on to argue that independent directors are effective in monitoring the decisions taken by managers, suggesting that with a rise in the number of independent directors, there is a corresponding reduction in the probability of a hostile takeover. Furthermore, the independence of the board has been found to have a positive correlation with the quality of the information disclosed by a firm, where Farber (2005) and Beasley et al. (2000) show that firms which fraudulently manipulate their financial statements have fewer independent board members. Klein (2002) also suggests that firms which have more independent board members are less likely to encounter earnings management problems. However, Hermalin and Weisbach (1991) argue that it may be difficult for independent directors to monitor senior management officials since they can often control the boardselection process, whilst independent directors may have problems in ascertaining the value of the day-to-day operations of the company. Hermalin and Weisbach (1991) also argue that an independent board only affects extraordinary events, such as unusually poor performance. The net effect of board independence is therefore ambiguous. Therefore, we follow the prior studies to hypothesize that: Hypothesis 2a: board independence is positively associated with stock market reaction to new product introductions. Hypothesis 2b: board independence is negatively associated with stock market reaction to new product introductions. 2.3 Audit committee independence An audit committee is a sub-committee of a company’s main board of directors which is established to increase the credibility of audited financial statements as well as to help the board meet its responsibilities. The members of the audit committee meetg regularly to review the company’s financial statements and to audit its processes and internal control systems. Independent directors are expected to improve the effectiveness of the audit board as a monitoring device, for example by making it more difficult for departing CEOs to manipulate accruals (Reitenga and Tearney 2003), thus reducing the likelihood of fraudulent financial reporting (Beasley 1996; Beasley et al. 2000). As such, we expect to find a positive relationship between independent directors on the audit committee, along with increases in both the monitoring effect and the wealth effect of firms announcing new product strategies: Hypothesis 3: audit committee independence is positively associated with stock market reaction to new product introductions. 2.4 CEO equity-based pay Well-designed executive compensation plans, which include equity ownership, can help to align the interests of managers and shareholders (Datta et al. 2001; Masulis et al. 2007; Bauman and Shaw 2006). The alignment of shareholder interests with managerial incentives suggests a positive relationship between a firm’s performance and its governance structure, essentially because the latter is designed to reduce the agency costs arising from the separation of ownership and control. Murphy and Dial (1995) show that stock-based compensation is important in executing corporate downsizing, resulting in the transference of resources to higher-valued opportunities, whilst Datta et al. (2001) show that an acquiring firm’s compensation structure influences both the stock price and responses to acquisition announcements by the bidding firms.

123

278


Based on the above, investors can assume that firms whose CEOs’ pay is equity-based will pursue new product innovations that are expected to increase firm value (and thus CEO wealth). We therefore construct the following hypothesis: Hypothesis 4: CEO equity-based pay is positively associated with the stock market reaction to new product introductions. 2.5 Analyst following By collecting, analyzing and disseminating information on a firm, analysts play a crucial role in helping to the reduce agency costs associated with the separation of ownership and control (Jensen and Meckling 1976) as they are seen as vital instruments of an efficient and secure informational marketplace through both providing market information and effectively monitoring and disciplining managerial behavior (Healy and Palepu 2001; Best et al. 2003). As such, analysts may elicit managerial responsiveness, and thereby reduce the probability of resource-wasting investments (Moyer et al. 1989). For example, the results presented by Yu (2008) show that more comprehensive analyst coverage is consistent with less earnings management, and that changes in analyst coverage are inversely related to changes in earnings management. This leads us to our fifth hypothesis: Hypothesis 5: analyst following is positively associated with stock market reaction to new product introductions. 2.6 Shareholder rights The shareholder rights can restrain management empire building, in that firms that make value-destroying investment (Mitchell and Lehn 1990). Furthermore, the ability of shareholder rights can provide managers with the appropriate incentives to maximize shareholder wealth (Cheng et al. 2006; Masulis et al. 2007). We use Gompers et al.’s (2003) G-index to proxy for the shareholder rights of corporate governance. The index is based on 24 antitakeover provisions and measures the power-sharing relationship between investors and management. A higher G-index score indicates lower shareholder rights and greater management power. Based on agency theory, a new product announcement by a firm with a higher G-index score (less shareholder rights) is expected to exhibit a lower wealth effect as it is thus more difficult or costly to remove management that is acting opportunistically. On the other hand, a firm with stronger shareholder rights (a lower G-index score) is more likely to have stronger monitoring and control processes in place, leading to more effective and efficient managerial decision making. Accordingly, the sixth hypothesis proposed in this study is: Hypothesis 6: G-index scores are negatively associated with stock market reaction to new product introductions.

3 Sample and variables 3.1 Data sample This study collects an initial sample of announcements of new product introductions by firms listed on the New York Stock Exchange (NYSE) or the American Stock Exchange (AMEX), covering the 8 year period from 1997 to 2004; the data is collected from the

123


279

LexisNexis Academic NEWS database. In order to be included in the final sample, the new product announcements have to meet specific criteria, as follows: In order to avoid any confounding events which might distort the measurement of announcement returns, we exclude those announcements by firms that made other major announcements—such as announcements of quarterly earnings, mergers and acquisitions or changes in dividends— either 5 days before or 5 days after the announcement of the new product. Furthermore, in order to ensure that the new product announcements are not affected by information leaked ahead of time, we discard any new product announcements if there has been news items reported in major newspapers up to 1 year prior to the announcement date. We also exclude the announcing firms if no data is available on the firms from the return files of the Center for Research in Securities Prices (CRSP). Finally, we exclude those announcements where the corporate governance measures (to be described below) are unavailable. Our final sample is comprised of 1,945 new product announcements made by 341 different firms. 3.2 Stock market reaction We employ standard event-study methodology to examine the response in stock prices to announcements of new product introductions, with Day 0 being defined as the day on which the announcement first appears in any major publication. The abnormal return is calculated as the difference between the actual return and the expected return generated by the market model, with the value-weighted CRSP index being used as a proxy for market returns. The estimation of the parameters of the market model is based upon data covering the period from 200 to 60 days prior to the initial announcement date. Abnormal returns and cumulative abnormal returns are generated for each announcing firm over the period from 10 days before to 10 days after the initial announcement date. Cumulative abnormal returns over different event windows are then calculated by summing the daily abnormal returns during the event periods. We calculate the 2 day period abnormal returns (–1, 0)1 by summing the abnormal returns on the announcement day, and 1 day prior to the announcement date, in order to estimate the wealth effect of new product introductions. 3.3 Measuring corporate governance Our analysis of corporate governance is undertaken using the six different measures of Board Size, Board Independence, Audit Committee Independence, CEO Equity-based Pay, Analyst Following and G-index Score. The corporate governance data are obtained from the IRRC Board datasets, Compustat ExecComp and the I/B/E/S database, with the measures being estimated as at the end of the fiscal year prior to the new product announcements. We follow prior studies and measure Board Size as the number of directors on the board during the fiscal year preceding the new product announcement (Lehn and Zhao 2006; Masulis et al. 2007). Independent directors are defined as those who hold no executive position, have held no such position in the past, and are unrelated to any executive or 1

If such announcements occur after the close of trading on the previous day, then the impact on share prices will be felt on the day in which the announcements appear in the publication. If the announcements are released prior to the close of trading hours, any immediate valuation effect will be reflected in the share prices on the day prior to the announcement appearing in print.

123

280


director in the announcing firm. Board Independence is measured as the ratio of independent directors on the board for the fiscal year preceding the new product announcement, and following Klein (2002), we measure Audit Committee Independence as the ratio of the number of independent directors to the number of directors on the audit committee. CEO Equity-based Pay is measured, following Datta et al. (2001) and Masulis et al. (2007), as the ratio of equity-based compensation within the overall compensation package, with equity-based pay being defined specifically as the value of all stock options and restricted stock grants. Analyst Following is a measure of external monitoring which is defined as the average number of analyst forecasts taking place during the fiscal year prior to the new product announcement. Finally, we use Gompers et al.’s (2003) G-index as a proxy to measure the power-sharing relationship between investors and management. Each firm’s G-index Score is the sum of points, where one point is awarded for the presence of each of the 24 provisions included. 3.4 Measuring control variables The control variables included in the regression analyses are a firm’s Investment Opportunities (where Tobin’s Q is used as a proxy), Free Cash Flow, Debt Ratio, Firm Size, Relative R&D Intensity and Industry Competitiveness (where the Herfindahl Index, is used as a proxy), all of which have been found within the prior literature to be important in explaining the stock market reaction to new product announcements. All of the data on these control variables are obtained from the Compustat files. Investment Opportunities. The degree of availability of investment opportunities can be an important consideration in assessing the value of corporate innovations. Innovations by firms with good investment opportunities are generally regarded as worthwhile, whereas those by firms with poor investment opportunities are not. Therefore, share price responses to new product announcements are expected to have a positive correlation with a firm’s investment opportunities. Investment opportunities are estimated in this study using a firm measure of Tobin’s Q, where a high Tobin’s Q represents a high degree of investment opportunities. Given a lack of availability of data,2 we estimate Tobin’s Q as the ratio of the market-to-book value of the firm’s assets, where the market value of assets is the book value of assets minus the book value of common equity plus the market value of common equity. This measure has been widely used in many of the prior studies as a means of estimating growth opportunities (Agrawal and Knoeber 1996; Barclay and Smith 1995a, 1995b; Denis 1994; Holderness et al. 1999; Kang and Stulz 1996). Our Tobin’s Q variable is calculated as the average ratio for the three fiscal years prior to the announcement date. Free Cash Flow. The degree of availability of free cash flow can also be an important consideration in determining the value-enhancing potential of corporate innovations. Jensen (1986) argues that managers endowed with higher free cash flow will invest wastefully, as opposed to ensuring that it is returned to shareholders. Therefore, the potential agency costs of innovations can be higher for firms with higher free cash flow.

2

Tobin’s Q is technically defined as the ratio of the market value of a firm to the replacement cost of its assets, as the difference between market value and replacement value is dependent upon the profitability of both the firm’s assets in place and its expected investment opportunities. If the profitability of the firm’s assets in place is high, its investment opportunities will also be expected to earn a high rate of return; thus, the firm will have a high Tobin’s Q (Lang and Litzenberger 1989).

123


281

On the other hand, innovations by firms with lower free cash flow raise the likelihood of the firm seeking new external financing. As free cash flow theory predicts that the market response to a new product will be inversely related to the firm’s free cash flow, any new external financing provides a monitoring function, and the firm’s willingness to undergo such monitoring can be seen as providing a favorable signal (Szewczyk et al. 1996). In this study, Free Cash Flow is defined as operating income before depreciation minus interest expense, taxes, preferred dividends and common dividends divided by the book value of total assets for the fiscal year preceding the announcement (Lang et al. 1991; Lehn and Poulsen 1989). Debt Ratio. Jensen (1986) suggests that a firm’s debt ratio can be regarded as an alternative measure of free cash flow. Firms with greater free cash flow will invariably opt for higher levels of debt within their overall capital structure since this provides a credible pre-commitment to paying out their excess cash flow, thereby lowering the expected costs of such free cash flow. The Jensen theory thus suggests a positive relationship between the market response to corporate announcements of new products and the debt ratio of the announcing firm. The Debt Ratio is measured in the present study as the ratio of the book value of long-term debt to the book value of total assets for the fiscal year prior to the announcement (Lang and Stulz 1992). Firm Size. Innovations by larger firms have less unanticipated information than those of smaller firms, essentially because information production and dissemination is a positive function of firm size (Atiase 1985; Hertzel and Smith 1993; Kang and Stulz 1996); we therefore expect to find an inverse relationship between firm size and the evaluation by the market of a firm’s new product. In the present study, Firm Size is measured as the natural logarithm of the book value of total assets for the fiscal year preceding the announcement (Chen et al. 2002). Relative R&D Intensity. Since firms with greater relative R&D intensity may occupy leading positions in technological advances (Baysinger and Hoskisson 1989; Kelm et al. 1995), we expected to find a positive correlation between a firm’s relative R&D intensity and the wealth effect of stockholders when firms announce new products. Following Chan et al. (1990) and Szewczyk et al. (1996), we measure the R&D intensity of a firm as the ratio of its R&D expenditure to sales in the fiscal year –1. We then estimate the R&D intensity of the industry as the ratio of R&D expenditure to the net sales of all firms with the same primary Compustat four-digit SIC code. Finally, a firm’s Relative R&D Intensity, which is a measure of the firm’s financial resources allocated to R&D relative to that of its peers, is calculated as the ratio of the firm’s R&D intensity to the R&D intensity of the industry in which the firm is located. Industry Competitiveness. Woolridge and Snow (1990) present that the announcement of strategic investment decisions may release an unexpected improvement in the investing firm’s cash flow that derives from an increase in its market share. The investing firm within an imperfect competitive environment may gain at the expense of rival firms. As such, this study expects that the stock price reaction to new product announcements will be more positive in industries with a lower degree of competition. The level of industry competitiveness is represented in this study by the Herfindahl Index, which is measured as the sum of the squared proportion of industry sales. The data is collected from Compustat for a total of 48 industries based upon the industry classification of Fama and French (1997).3 Although this index is essentially a measure of concentration, it has, nevertheless, been 3

This follows the approach used in Masulis et al. (2007), Giroud and Mueller (2011), and Chen et al. (2010).

123

282


Table 1 Sample distribution Year 1997

1998

1999

2000

2001

2002

2003

2004

Total

No. of announcements

282

229

288

212

128

169

259

378

1,945

Share of sample (%)

14.5

11.8

14.8

10.9

6.6

8.7

13.3

19.4

100.0

Our study sample is comprised of a total of 1,945 new product announcements made between 1997 and 2004 by 341 firms listed on either the NYSE or the AMEX

widely used as a proxy for competitiveness largely because of the inverse relationship generally found between the degree of concentration and the degree of competition.

4 Empirical results Table 1 presents the sample distribution, by year of announcement, which shows that about 33 per cent of the sample announcements occurred in 2003 and 2004. Table 2 provides the descriptive statistics and Pearson’s correlation coefficients for all of the corporate governance and control variables adopted in this study. Our sample firms have an average of ten directors on their boards, with a mean proportion of independent directors of 71 per cent, and about 88 per cent of all directors on the audit committees being totally independent. The mean ratio of equity-based compensation is 0.59 and the average number of analyst following is 18.58. 4.1 Overall sample The abnormal returns for new product announcements are presented in Table 3, which shows that the average 2 day announcement period abnormal return is 0.54 per cent (t = 7.02), with a statistical significance at the 0.1 per cent level. We also calculate the median abnormal returns of each window and conduct significance tests using the nonparametric Wilcoxon z-statistic, and the results are very similar. This finding is consistent with Woolridge (1988) and Chen et al. (2002).4 Our results also indicate, however, that there is a particularly high variation in the announcement effect amongst our sample firms; the proportion of firms receiving positive market reactions is only 51 per cent. We find no significant abnormal returns for other days surrounding the announcements. This suggests that the impact of new product announcements is captured in the CAR (–1, 0). 4.2 Analysis of subsamples based on the governance mechanism To test the impact of the corporate governance mechanism on the stock price response of new product announcement, we divide the sample firms into two governance sub-groups based upon their ‘better’ or ‘poorer’ corporate governance levels. We then calculate the 4

Woolridge (1988) demonstrates that between 1972 and 1984, the 2 day (–1, 0) average cumulative market-adjusted return for a sample of product-announcing firms is 0.84 per cent, whilst Chen et al. (2002) show that for a sample of firms announcing new product introductions between 1991 and 1995, the two-day (–1, 0) average cumulative abnormal return is 0.59 per cent, with significance at the 1 per cent level; our mean two-day abnormal return is 0.54 per cent, with significance at the 1 per cent level. The magnitude of the abnormal return found in this study is therefore very much in line with those found in prior studies.

123

1,918

1,868

1,847

1,899

1,924

1,880

1,945

1,945

1,945

1,945

1,945

1,945

1. Board size

2. Board independence

3. Audit Committee independence

4. CEO equity- based pay

5. Analyst following

6. G-Index

7. Tobin’s Q

8. Free cash flow

9. Debt ratio

10. Firm size (US$ millions)

11. R&D intensity

12. Herfindahl index

0.06

1.23

24,451

0.32

0.10

2.24

8.71

18.58

0.59

0.88

0.71

10.33

Mean

0.04

3.05

64,967

0.54

0.07

1.26

2.39

9.50

0.30

0.18

0.15

2.63

S.D. 0.09

2

0.55

***

0.01

3

–0.02

0.10

–0.04

4

0.30

–0.13

0.06

0.34

5

–0.24***

–0.18***

0.13***

0.07***

0.06**

6

*** indicates that the correlation coefficient is greater than 0.5 with significance at the 1 per cent level

Obs.

Variables

Table 2 Summary statistics and correlations

–0.04*

0.23

0.20

–0.13

–0.17

–0.02

7

0.23

–0.06***

0.09

0.12

–0.15

–0.07

0.03

8

–0.21

–0.07

0.03

–0.08

–0.15

0.03

–0.04

0.15

9

0.13

–0.13

–0.10

–0.16***

–0.15

–0.01

–0.0003

0.13

–0.01

–0.08 –0.05

0.65***

0.01 0.13

0.04

–0.11

0.04

0.57*** 0.23

11

10

–0.03

0.09***

0.02

–0.10***

–0.05**

0.02

–0.08***

–0.13***

0.00

0.02

0.17***

12

Corporate governance and the stock market reaction 283

123

284


Table 3 Cumulative abnormal returns for firms making new product announcements Period relative to announcement

(–10, –4)

Cumulative abnormal returnsa b

Mean (%)

t-statistic

Median (%)

Proportion of positive abnormal returns (%) p-value for the Wilcoxon z-statistic

–0.15

–0.94

–0.11

0.412

49

(–3)

0.05

0.74

–0.03

0.888

49

(–2)

–0.06

–0.92

–0.14

0.098

47

0.08

0.000

51

(–1, 0)

0.54

7.02***

(1)

–0.01

–0.09

–0.06

0.438

49

(2)

0.04

0.61

–0.12

0.462

47

(3)

–0.06

–0.94

–0.18

0.006

46

(4, 10)

–0.25

–1.56

–0.07

0.238

49

a

This table examines the cumulative abnormal returns surrounding the announcements of 1,945 new product introductions which took place between 1997 and 2004

b

The p-value refers to the t-statistic

*** indicates p \ 0.01

stock market reaction to the new product introduction and examine the mean and median difference in the stock market reaction between the groups with these ‘better’ and ‘poorer’ governance levels. We expect to find a more positive market reaction to new product introductions by the better governance group than those by the poorer governance group. To examine the effects of Board Size, we separate the firms into smaller or larger boards (Panel A of Table 4) based upon the sample median size of ten board members. The results show that firms with smaller boards experience a significantly positive mean announcement effect of 0.86 per cent (t = 7.78), whilst the mean announcement effect of firms with larger boards is 0.30 per cent (t = 3.12). The mean difference in CAR between firms with smaller and larger boards is 0.56 per cent (t = 3.80). The results suggest that corporate governance is more effective in firms with small boards, and that this may provide investors with a more positive signal on the valuation of new products. Our finding is consistent with the argument of Yermack (1996), which small boards can more effectively monitor the investment decisions taken by managers. The effect of Board Independence, measured by the ratio of independent board members, is examined in Panel B of Table 4. The sub-samples of greater (lesser) independence contain firms with ratios of independent board members higher (lower) than the sample median of 75 per cent. The results show that following the announcement of new product introductions, firms with a greater number of independent members experience a significantly positive mean abnormal return of 0.75 per cent (t = 7.66), whilst the return for firms with less independent directors is 0.36 per cent (t = 3.64). The mean difference between the sub-groups is 0.39 per cent (t = 2.79), which is found to have statistical significance at the 1 per cent level. The effects of Audit Committee Independence are examined in Panel C of Table 4, which shows that whilst firms in both sub-samples receive a significantly positive stock market reaction, the mean abnormal return is significantly greater for firms with greater audit committee independence than for those firms with less audit committee independence. The evidence is consistent with the results presented in Panels A and B of Table 4, and suggests that the independence of directors is an important consideration in investors’ value assessment of new product introductions.

123

Corporate governance and the stock market reaction Table 4 Announcement period abnormal returns of announcers, by corporate governance mechanisms

285

Panel A: board size (median = 10) Small

Large

Difference

Mean

0.86

0.30

0.56

t-statisticb

(7.78)***

(3.12)***

(3.80)***

Median

0.22***

–0.06

0.28**

No. of observationsa

1,051

867

Panel B: board independence (median = 75%) Greater

Less

Difference

Mean

0.75

0.36

0.39

t-statisticb

(7.66)***

(3.64)***

(2.79)***

0.27***

0.02*

0.25**

954

914

Median a

No. of observations

Panel C: audit committee independence (median = 1) Greater

The analysis of the sub-samples is undertaken based upon the relative corporate governance variables from Panels A to E, with the 2 day (–1, 0) average announcement period abnormal returns being generated for each announcing firm over the period 1 day prior to the initial announcement date a

The number of observations varies across panels as a result of the unavailability of certain governance variables b

For the comparison of the means, we report the mean difference and the t-statistic under the assumption of unequal variances; the results are similar to those obtained under the assumption of equal variance. The non-parametric Wilcoxon z-statistic is employed to test the median difference * indicates p \ 0.1

** indicates p \ 0.05 *** indicates p \ 0.01

Less

Difference 0.46

Mean

0.82

0.36

t-statisticb

(8.77)***

(3.27)***

(3.18)***

Median

0.21***

0.05**

0.17*


1,169

678

Panel D: CEO equity-based pay (median = 0.65) High

Low

Difference 0.51

Mean

0.84

0.34

t-statisticb

(7.51)***

(3.82)***

(3.56)***

Median

0.25***

0.01*

0.24**


933

966

Panel E: analyst following (median = 17.33) Greater

Less

Difference

Mean

0.74

0.41

0.33

t-statisticb

(6.66)***

(4.45)***

(2.20)**

Median

0.27***

–0.04

0.32**

No. of Observationsa

954

970

Panel F: G-index score (median = 9.00) Low

High

Difference

Mean

0.63

0.30

0.33

t-statisticb

(6.48)***

(2.48)**

(2.15)**

Median

0.26***

–0.16

0.42**


1,243

637

123

286


The impact of CEO Equity-based Pay is examined in Panel D of Table 4, from which we can see that the mean abnormal return for those firms whose CEOs received high proportions of equity-based compensation (0.84 per cent) is significantly greater than the mean for firms with low proportions of CEO equity-based compensation (0.34 per cent). This result highlights the importance of equity-based compensation in mitigating the agency problem. The impact of Analyst Following on the announcement effect of new product introductions is examined in Panel E of Table 4. Those firms described as having a greater analyst following were those with a greater number of analyst reports than the sample median of 17.33 during the fiscal year prior to the announcement of the new product introduction. As shown in the table, the mean abnormal returns for firms with greater (lesser) analyst following are 0.74 per cent (0.41 per cent), with the difference being found to be statistically significant at the 5 per cent level. Finally, we use the G-index Score as a proxy for shareholder rights, and use it to examine the impact of governance on the wealth effect of new product announcing firms. The results presented in Panel F of Table 4 show that the group with lower G-index scores experiences a significantly positive mean announcement effect (0.63 per cent), while the mean announcement effect for the group with a greater G-index score is positive (0.30 per cent).5 The mean difference in abnormal returns between the two groups is 0.33 per cent and significant at the 5 per cent level. We further calculate the median CARs of the subsamples in each panel, and find very similar results. In summary, the results in Table 4 provide clear support for our hypotheses that corporate governance measures are generally of significance in explaining the stock market reaction to new product announcements. However, it is important to note that we did not control for other potential factors that may also influence stock market responses. 4.3 Cross-sectional regression analyses In order to further examine the impact of corporate governance on the stock market reaction to the new product introductions, we employed the following cross-sectional regression model: CARi ¼ a þ b1 CGi þ b2 CG High HHI þ b3 Tobin0 s Qi þ b4 Free Cash Flowi þ b5 Debt Ratioi þ b6 Firm Sizei þ b7 Relative R&D Intensityi þ b8 Herfindahl Indexi þ ei where CAR refers to the 2 day (–1, 0) announcement-period abnormal returns for a firm introducing a new product; CG refers to the corporate governance variable; High_HHI is equal to 1 if the industry’s Herfindahl index is in the top quartile of all industries;6 Tobin’s Q refers to the ratio of the market-to-book value of the firm’s assets; Free Cash Flow is the free cash flow of the firm; Debt Ratio is the ratio of the book value of long-term debt to the book value of total assets; Firm Size refers to the natural logarithm of the book value of total assets; Relative R&D Intensity is the ratio of the firm’s R&D intensity to the R&D 5

Other studies, such as Gompers et al. (2003), Masulis et al. (2007) and Giroud and Mueller (2011), refer to companies with a G-index score of 5 or less as democracies and to companies with a G-index score of 14 or greater as dictatorships. We have also used 5 and 14 as the cut-off G-index scores in our sensitivity analysis. The conclusions in our study remain unchanged.

6

We have also used median and top tercile as the cut-off Herfindahl index values in our sensitivity analysis. The conclusions in our study remain unchanged.

123


287

intensity within the industry in which the firm is located; and Herfindahl Index refers to the Herfindahl index7 of the firm. The literature suggests that industry competition could also influence the impact of corporate governance on abnormal returns (Giroud and Mueller 2011). Shleifer and Vishny (1997) present that managers of firms in competitive industries are likely to reduce slack and put valuable resources into efficient uses. Giroud and Mueller (2011) argue that firms in noncompetitive industries, where low competitive pressure results in managers reducing their effort, corporate governance plays a relatively more important role. To consider the mediation effect of product market competition,8 we included the interaction term (CG 9 High_HHI) in the regressions. The results of the multivariate cross-sectional regression analyses of the 2 day (–1, 0) announcement-period abnormal returns are presented in Table 5, for both the corporate governance measures and the control variables. It is important to note that the observations are found to vary across regression models, essentially due to data availability limitations. The effects of the size of the board are tested in Model 1, with the results showing that the coefficient of Board Size is –1.438 (t = –3.96), which is negatively and statistically significant at the 1 per cent level. This result suggests that the announcement effect is more favorable for firms with a smaller board size. The coefficient of Board Independence in Model 2 is 0.010 (t = 1.93), which indicates that the number of independent directors has a positive correlation with the stock market reaction to new product announcements. The importance of Audit Committee Independence is examined in Model 3, with the findings suggesting a strong positive relationship between the independence of the audit committee and the reaction by the market to new product introductions. The influence of CEO Equitybased Pay is tested in Model 4, with the results revealing a positive effect. Model 5 examines the influence of analyst reports, with the coefficient on Analyst Following being found to be 0.863 (t = 5.08) and demonstrating a significantly positive correlation with the wealth effect of new product announcements. Model 6 shows that the G-index Score is significantly negatively related to the announcement of firms’ cumulative abnormal returns. That is, the announcement effect is significantly more favorable for announcing firms with greater shareholder rights. The results are again consistent with the prediction for the role of corporate governance in explaining the wealth effects of new product introductions. The control variables in the models show signs that are generally consistent with the prior studies. However, all except Firm Size are found to be insignificant in the present study, while Firm Size is found to be statistically significant with and a negative correlation with abnormal returns during the announcement period of new product introductions.9 This indicates that new product introductions by larger firms may contain less unanticipated information than those of smaller firms, and. This is essentially attributable to the fact that information production and dissemination remains a positive function of firm size (Hertzel and Smith 1993; Kang and Stulz 1996).

7

Qualitatively similar results are obtained if the Herfindahl index is measured by the sum of the squared market shares of all Compustat firms based on the industry classification of their Compustat four-digit SIC code (as in Lang and Stulz 1992, and Song and Walkling 2000).

8

Our results are similar when the competitive structure of an industry is measured by the product uniqueness (as in Masulis et al. 2007 and Chen et al. 2010).

9

We also obtained similar results when we used net sales and the number of employees to measure the size of the firm.

123

123

5.48***

0.008

1,918


–0.27 1,847

0.005

–2.847

–1.31

–0.94

–1.85*

1,899

0.001

–0.568

–0.017

–0.064

–0.30

–0.71

–1.33

The number of observations varies across regressions as a result of the non-availability of certain governance variables

*** indicates p \ 0.01

** indicates p \ 0.05

* indicates p \ 0.10

a

The dependent variable is the 2 day (–1, 0) announcement period cumulative abnormal return (CAR)

1,868

0.001

–0.553

–0.022

–0.088

1,924

0.012

–1.879

–0.017

–0.338

0.081

–0.87

–0.67

–4.68***

0.57

–0.65

1,880

0.002

–1.392

–0.020

–0.134

0.030

–0.422

–0.018

Adjusted R2

–0.09

–0.71

–1.05

–0.19

–0.773

2.07**

–0.209

–0.016

–0.050

–0.026

–0.23

0.135

Herfindahl index

0.13

0.35

–0.38

–0.258

–0.33

0.003

–0.051

–0.93

–0.020

0.021

–0.52

–1.086

–0.55

Relative R&D intensity

–0.069

–0.41

–0.033

Firm size

–0.05

–0.460

–0.10

–0.008

2.577

Debt ratio

0.52

–0.006

0.69

5.08***

3.28***

0.616

–0.49

0.053

0.863

1.665

Coeff.

Free cash flow

–1.40

2.32**

2.02**

t-stat.

–0.030

–0.401

0.624

0.981

Coeff.

Tobin’s Q

–0.80

2.26**

1.69*

t-stat.

–0.001

–0.002

0.009

1.044

Coeff.

Model 6

–0.078 –0.79

1.93*

0.88

t-stat.

Model 5

–0.016

–0.002

0.010

0.485

Coeff.

Model 4

CG 9 High_HHI

–0.17

–3.96***

t-stat.

Model 3

G-Index

Log(analyst following)

CEO equity-based pay

Audit committee independence

Board independence

3.751

–1.438

Log(board size)

Coeff.

Coeff.

t-stat.

Model 2

Model 1

Intercept

Variables

Table 5 Cross-sectional regression analyses of announcement-period abnormal returns

–0.60

–0.82

–2.59***

0.20

–0.30

–0.25

–0.05

–2.37**

4.05***

t-stat.

288 W.-C. Lin, S.-C. Chang


289

5 Conclusions This study examines the relationship between corporate governance and the market reaction to new product announcements. We investigate a sample of US firms announcing new product introductions between 1997 and 2004, with the results revealing that new product announcements are generally associated with significantly positive abnormal returns. The results further indicate that those firms with a small board size, greater board independence, a more independent audit committee, higher CEO equity incentives, more analyst coverage and greater shareholder rights (represented by a lower G-index score) see greater announcement effects. The evidence is consistent with the hypothesis that better corporate governance mechanisms reduce agency costs, whilst also increasing the value creation of new product introductions through monitoring and alignment mechanisms. Our findings suggest that corporate governance factors are important for investors in assessing the valuation effect of innovation. Financial markets consider not only innovation-specific information, but also factors relating to managerial incentives. Better governance mechanisms convey positive information to investors that investments are not being made for the personal interests of managers. This is an effect which is expected to be of greater importance in cases where there is strong information asymmetry between firms and investors. Managers are advised to take this signaling effect of corporate governance into consideration in all areas relating to information disclosure.

References Agrawal A, Knoeber CR (1996) Firm performance and mechanisms to control agency problems between managers and shareholders. J Financ Quant Anal 31:377–397 Agrawal A, Mandelker G (1987) Managerial incentives, corporate financing and investment decisions. J Finance 42:823–838 Anderson R, Bates T, Bizjak J, Lemmon M (2000) Corporate governance and firm diversification. Financ Manag 29:5–22 Atiase K (1985) Pre-disclosure information, firm capitalization and security price behavior around earnings announcements. J Account Res 23:20–36 Barclay MJ, Smith CW Jr (1995a) The maturity structure of corporate debt. J Finance 50:609–631 Barclay MJ, Smith CW Jr (1995b) The priority structure of corporate liabilities. J Finance 50:899–917 Bauman MP, Shaw KW (2006) Stock option compensation and the likelihood of meeting analysts’ quarterly earnings targets. Rev Quant Finance Account 26:301–319 Baysinger B, Hoskisson RE (1989) Diversification strategy and R&D intensity in multi-product Firms. Acad Manag J 32:310–332 Beasley MS (1996) An empirical analysis of the relation between board of director composition and financial statement fraud. Account Rev 71:443–465 Beasley MS, Carcello JV, Hermanson DR, Lapides PD (2000) Fraudulent financial reporting: consideration of industry traits and corporate governance mechanisms. Account Horizons 14:441–454 Best RW, Payne JD, Howell JC (2003) Analyst following and equity offerings subsequent to initial public offerings. Rev Quant Finance Account 20:155–168 Bizjak J, Brickley JA, Coles J (1993) Stock-based incentive compensation and investment behavior. J Account Econ 16:349–372 Brunello G, Graziano C, Parigi BM (2003) CEO turnover in Insider-dominated boards: the Italian case. J Banking and Finance 27:1027–1051 Chaganti RS, Mahajan V, Sharma S (1985) Corporate board size, composition and corporate failures in the retailing industry. J Manag Stud 22:400–416 Chan SH, Martin JD, Kensinger JW (1990) Corporate research and development expenditure and share value. J Financ Econ 26:255–276 Chaney PK, Devinney TM, Winer RS (1991) The impact of new product introductions on the market value of firms. J Bus 64:573–610

123

290


Chen SS (2008) Organizational form and the economic impact of corporate new product strategies. J Bus Finance Account 35:71–101 Chen SS, Ho KW (1997) Market response to product strategy and capital expenditure announcements in Singapore: investment opportunities and free cash flow. Financ Manag 26:82–88 Chen SS, Ho KW, IK K, Lee CF (2002) How does strategic competition affect firm values? A study of new product announcements. Financ Manag 31:67–84 Chen WP, Chung H, Hsu TL, Wu S (2010) External financing needs, corporate governance, and firm value. Corp Gov: Int Rev 18:234–249 Cheng CS, Collins D, Huang HH (2006) Shareholder rights, financial disclosure and the cost of equity capital. Rev Quant Financ Account 27:175–204 Claessens S, Djankov S, Fan PH, Lang HP (2002) Disentangling the incentive and entrenchment effects of large shareholdings. J Finance 57:2741–2771 Coles JW, McWilliams VB, Sen N (2001) An examination of the relationship of governance mechanisms to performance. J Manag 27:23–50 Cornett MM, Hovakimian G, Palia D, Tehranian H (2003) The impact of manager-shareholder conflict on acquiring bank returns. J Banking Finance 27:103–131 Daily CM, Dalton DR, Rajagopalan N (2003) Governance through ownership: Centuries of practice, decades of research. Acad Manag J 46:151–159 Datta S, Iskandar-Datta M, Raman K (2001) Executive compensation and corporate acquisition decisions. J Finance 56:2299–2336 Denis DJ (1994) Investment opportunities and the market reaction to equity offerings. J Financ Quant Anal 29:159–177 Denis DJ, Denis D, Sarin A (1997) Agency problem, equity ownership and corporate diversification. J Finance 52:135–160 Eagly A, Wood W, Chainken S (1978) Causal inferences about communicators and their effect on opinion change. J Pers Soc Psychol 36:424–435 Eccles RC, Kahn H (1998) Pursuing value: the information reporting gap in the US capital markets (PriceWaterhouse Coopers LLP) Fama E (1980) Agency problems and the theory of the firm. J Political Econ 88:539–561 Fama E, French K (1997) Industry costs of equity. J Financ Econ 43:153–194 Fama E, Jensen M (1983) Agency problem and residual claims. J Law Econ 26:327–350 Farber DB (2005) Restoring trust after fraud: does corporate governance matter. Account Rev 80:539–561 Frost C (1997) Disclosure policy choices of UK firms receiving modified audit reports. J Account Econ 23:163–187 Gibbs P (1993) Determinants of corporate restructuring: the relative importance of corporate governance, takeover threat and free cash flow. Strateg Manag J 14:51–68 Giroud X, Mueller HM (2011) Corporate governance, product market competition, and equity prices. J Finance, forthcoming Gompers P, Ishii J, Metrick A (2003) Corporate governance and equity prices. Q J Econ 118:107–155 Healy P, Palepu K (2001) Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature. J Account Econ 31:405–440 Hermalin B, Weisbach M (1991) The effects of board composition and direct incentives on firm performance. Financ Manag 20:101–112 Hertzel M, Smith R (1993) Market discounts and shareholder gains for placing equity privately. J Finance 48:459–485 Hill C, Snell S (1988) An empirical analysis of the reincorporation decision. J Financ Quant Anal 33:549–568 Holderness CG, Kroszner RS, Sheehan DP (1999) Were the good old days that good? Changes in managerial stock ownership since the great depression. J Finance 54:435–469 Hoskisson R, Johnson R, Moesel D (1994) Corporate divestiture intensity in restructuring firms: The effects of governance, strategy and performance. Acad Manag J 37:1207–1251 Jensen MC (1986) Agency costs of free cash flow, corporate finance and takeovers. Am Econ Rev 76:323–329 Jensen MC (1993) The modern industrial revolution, exit and the failure of control systems. J Finance 48:831–880 Jensen MC, Meckling W (1976) Theory of the firm: managerial behavior, agency costs and ownership structure. J Financ Econ 3:305–360 Kang J, Stulz RM (1996) How different is Japanese corporate finance? An investigation of the information content of new security issues. Rev Financ Stud 9:109–139

123


291

Kelm KM, Narayanan VK, Pinches GE (1995) Shareholder value creation during R&D innovation and commercialization stages. Acad Manag J 38:770–786 Kim W, Black BS, Jang H (2006) Does corporate governance predict firms’ market values? Evidence from Korea. J Law Econ Organ 22:366–413 Klein A (2002) Audit committee, board of director characteristics and earnings management. J Account Econ 33:375–400 Koch A (2002) Financial distress and the credibility of management earnings forecasts. Working Paper (Carnegie Mellon University) Lang LHP, Litzenberger R (1989) Dividend announcements: Cash flow signaling vs. free cash flow hypothesis? J Financ Econ 24:181–191 Lang LHP, Stulz RM (1992) Contagion and competitive intra-industry effects of bankruptcy announcements: an empirical analysis. J Financ Econ 32:45–60 Lang LHP, Stulz RM, Walkling RA (1991) A test of the free cash flow hypothesis: the case of bidder returns. J Financ Econ 29:315–335 Lee KW, Lee CF (2009) Cash holdings, corporate governance structure and firm valuation. Rev Pac Basin Financ Mark Policies 12:475–508 Lehn KM, Poulsen A (1989) Free cash flow and stockholder gains in going private transactions. J Finance 44:771–787 Lehn KM, Zhao M (2006) CEO turnover after acquisitions: are bad bidders fired. J Finance 61:1759–1811 Lipton M, Lorsch JW (1992) A modest proposal for improved corporate governance. Bus Lawyer 48:59–77 Luo Q, Hachiya T (2005) Corporate governance, cash holdings, and firm value: evidence from Japan. Rev Pac Basin Financ Mark Policies 8:613–636 Masulis R, Wang C, Xie F (2007) Corporate governance and acquirer returns. J Finance 62:1851–1889 Mercer M (2004) How do investors assess the credibility of management disclosures? Account Horizons 18:185–196 Mitchell ML, Lehn K (1990) Do bad bidders become good targets? J Political Econ 98:372–398 Monks RAG, Minow N (1995) Corporate governance. Blackwell, Oxford Moyer RC, Chatfield RE, Sisneros PM (1989) Security analyst monitoring activity: agency costs and information demands. J Financ Quant Anal 24:503–512 Murphy K, Dial J (1995) Compensation and strategy at general dynamics. J Financ Econ 37:261–315 Pantzalis C, Kim CF, Kim S (1998) Market valuation and equity ownership structure: the case of agency conflict regimes. Rev Quant Financ Acc 11:249–268 Pauwels K, Silva-Risso J, Srinivasan S, Hanssens DM (2004) New products, sales promotions and firm value: the case of the automobile industry. J Mark 68:142–156 Reitenga AL, Tearney MG (2003) Mandatory CEO retirements, discretionary accruals and corporate governance mechanisms. J Account Auditing Finance 18:255–280 Shleifer A, Vishny RW (1997) A survey of corporate governance. J Finance 52:737–783 Singh M, Davidson WN III (2003) Agency costs, ownership structure and corporate governance mechanisms. J Banking Finance 27:793–816 Song M, Walkling R (2000) Abnormal returns to rivals of acquisition targets: a test of the acquisition probability hypothesis. J Financ Econ 55:143–172 Szewczyk S, Tsetsekos G, Zantout Z (1996) The valuation of corporate R&D expenditure: evidence from investment opportunities and free cash flow. Financ Manag 25:105–110 Wei KC, Zhang Y (2008) Ownership structure, cash flow and capital investment: Evidence from East Asian economies before the financial crisis. J Corp Finance 14:118–132 Weisbach MS (1988) Outside directors and CEO turnover. J Financ Econ 20:431–460 Weisbach MS (1993) Corporate governance and hostile takeovers. J Account Econ 16:199–208 Wild J (1996) The audit committee and earnings quality. JAccount Auditing Finance 11:247–276 Wiseman RM, Gomez-Mejia LR (1998) A behavioral agency model of managerial risk taking. Acad Manag Rev 23:133–153 Woolridge JR (1988) Competitive decline and corporate restructuring: is a myopic stock market to blame. JAppl Corp Finance 1:26–36 Woolridge JR, Snow CC (1990) Stock market reaction to strategic investment decisions. Strateg Manag J 11:353–363 Wu HL (2008) When does internal governance make firms innovative? J Bus Res 61:141–153 Xie B, Davidson W, DaDalt P (2003) Earnings management and corporate governance: the role of the board and audit committee. J Corp Finance 9:295–316 Yermack D (1996) Higher market valuation of companies with a small board of directors. J Financ Econ 40:185–211 Yu F (2008) Analyst coverage and earnings management. J Financ Econ 88:245–271

123