Does product market competition affect corporate governance? Evidence from corporate takeovers

We examine the extent to which shareholders strategically allow a weak governance structure in response to increasing competition pressures in the product market. We treat acquisitions by rival firms as shocks that increase threats in a competitive product market. We find that firms adopt greater entrenchment provisions when there are greater competition threats. Moreover, firms with high institutional ownership – especially by dedicated investors – and​ board independence within the compensation committee are particularly aggressive, which is consistent with our theory that aggressive behavior represents a strategic decision by shareholders. Finally, we find positive relationship between the adoption of entrenchment provisions and firm’s future performance, but only for the adoption under relatively severe competitive pressures.     

Executive risk incentives,product market competition,and R&D

Prior studies have examined the relation between product market competition (PMC) and research and development (R&D) investments, while the impact of executive risk incentives on this relation remains unexplored. In this study, we find that Vega (the sensitivity of executives’ wealth to stock return volatility) weakens the negative relation between PMC and R&D. We also find that Vega strengthens the negative relation between PMC and firm performance when R&D investments grow higher. In sum, our results suggest that high‐Vega compensation portfolios in competitive environments may induce executives to overinvest in R&D projects, therefore hurting firm performance.     

Estimating product market competition: Methodology and application

In oligopolies, firms behave strategically and commit to actions that elicit favorable responses from rivals. Firm actions consequently are a function of the nature of these strategic interactions. In this paper, we develop a methodology for the empirical estimation of strategic interactions in product markets. We then apply our measure of strategic interactions to CEO compensation. We use quarterly data on profits and sales from Compustat to estimate the slope of firm’s reaction function. When the slope is negative and marginal profits decrease with an increase in the rival’s actions the firm is classified as a strategic substitute. When the slope is positive and marginal profits increase with an increase in the rival’s actions the firm is classified as a strategic complement. As predicted by theory, we find significant evidence that strategic substitutes decrease the pay for performance incentives of their CEOs. On the other hand, strategic complements significantly increase CEO pay for performance incentives. The empirical measure developed can be used to test a wide variety of strategic models.     

Product Market Competition and Shareholder Rights: International Evidence

This paper examines the interaction between product market competition and international differences in shareholder rights in relation to firm performance and corporate policies. In contrast to existing literature, we provide evidence of complementarities between product market competition and country shareholder rights protections. The benefits of shareholder rights protections for firm performance are conditional on the presence of a competitive industry environment. We find that stronger shareholder rights protections are associated with better firm performance in competitive industries. However, this relation is not significant in concentrated industries. Consistent results are obtained from the analysis of key corporate policies.     

Financial Misrepresentation and Its Impact on Rivals

This paper examines how the announcement of an accusation of fraudulent financial misrepresentation affects industry rivals of the accused firm. Consistent with the importance of the industry competition effect, we find that rivals in less competitive industries benefit from the event. However, in competitive industries, the information spillover effect dominates the competition effect, resulting in negative returns to rival shareholders following the event. The spillover effect increases in importance with the severity of the accusation and is more important for opaque rivals and for rivals that had positive stock price reactions to past positive earnings surprises of the accused firm.     

Boards of Directors, Market Discipline and Firm Performance

Abstract:   The board of directors is generally seen as an important internal governance structure. However, the empirical evidence on the board‐performance relationship is not conclusive. On the other hand, a growing literature suggests that different control mechanisms, either internal or external to the firm, can interact with each other and affect performance. One such important factor is product market competition. The objective of the study is to investigate further the board‐performance relationship taking into consideration the potential effect of market competition. More precisely, the study analyzes the combined effect of boards of directors' characteristics, and market discipline on firm performance. Overall, the results suggest that competition has a positive and significant impact on firm profitability and productivity. Moreover, this determinant factor creates the conditions for which the board‐performance relationship is supported. In other words, for boards to be effective, firms should be exposed to a competitive environment.     

Cross‐Firm Real Earnings Management

Our analysis is rooted in the notion that stockholders can learn about the fundamental value of any firm from observing the earnings reports of its rivals. We argue that such intraindustry information transfers, which have been broadly documented in the empirical literature, may motivate managers to alter stockholders’ beliefs about the value of their firm not only by manipulating their own earnings report but also by influencing the earnings reports of rival firms. Managers obviously do not have access to the accounting system of peer firms, but they can nevertheless influence the earnings reports of rival firms by distorting real transactions that relate to the product market competition. We demonstrate such managerial behavior, which we refer to as cross‐firm real earnings management, and explore its potential consequences and interrelation with the practice of accounting‐based earnings management within an industry setting with imperfect (nonproprietary) accounting information.     

Employee‐friendly practices,product market competition and firm value

In this paper, we examine whether employee‐friendly practices are associated with product market competition, and whether firm value is related to employee‐friendly practices and product market competition. Using a large sample of US firms, we find positive and significant associations between employee friendliness and product market competition, and between firm value and employee friendliness when product market competition is high, consistent with the value creation theory. Both positive relations hold when we account for corporate governance. In addition, using the list of Fortune's ‘100 Best Companies to Work For’ as an alternative measure of employee‐friendly policies, we find firms in more competitive industries are more likely to treat their workers favourably. Furthermore, we find that the market reaction is more positive when firms in more competitive industries are selected for the Fortune list.     

Competitive intelligence and disclosure

Competitive intelligence (CI) activities open new opportunities for firms to acquire and disclose information. We show that disclosure depends on the relative usefulness of information to the competing firms and is generally less (more) likely with Cournot (Bertrand) competition and when firms adopt product differentiation strategies. When CI costs are independent of information characteristics, each firm seeks information solely useful to itself and discloses it unless it is a Bertrand competitor with customer information. Only when the cost advantage is sufficiently great does each firm seek information useful to itself and its rival.     

THE INTRA-INDUSTRY EFFECTS OF OPEN MARKET SHARE REPURCHASES: CONTAGION OR COMPETITIVE?

We examine the extent to which announcements of open market share repurchase programs affect the valuation of competing firms in the same industry. On average, although firms announcing open market share repurchase programs experience a significantly positive stock price reaction at announcement, portfolios of rival firms in the same industry experience a significant and contemporaneous negative stock price reaction. This suggests that perceived changes in the competitive positions of the repurchasing firms occur at the expense of rival firms and dominate any signals of favorable industry conditions. Thus, the competitive intra-industry effects of open market repurchases outweigh any contagion effects. In addition, cross-sectional tests indicate that these competitive effects are more pronounced in industries characterized by a lower degree of competition and less correlation between the stock returns of the repurchasing firm and its rivals.     

Real Options, Product Market Competition, and Asset Returns

We study how competition in the product market affects the link between firms' real investment decisions and their asset return dynamics. In our model, assets in place and growth options have different sensitivities to market wide uncertainty. The strategic behavior of market participants influences the relative importance of these components of firm value. We show that the relationship between the degree of competition and assets' expected rates of return varies with product market demand. When demand is low, firms in more competitive industries earn higher returns, whereas when demand is high firms in more concentrated industries earn higher returns.     

Common ownership and executive pay-for-performance sensitivity: Evidence from China

This study focuses on the impact of common ownership on executive pay-for-performance sensitivity using a sample of A-share listed firms in China from 2008 to 2020. We find common ownership significantly improves executive pay-for-performance sensitivity and plays a monitoring and governance role. Meanwhile, the impact of common ownership on executive pay-for-performance sensitivity is more significant in non-state-owned firms (non-SOEs) and when a firm faces a highly competitive product market. The mechanism tests indicate that common ownership affects executive pay-for-performance sensitivity through the information and governance mechanisms. Further analyses show that the portion of compensation explained by common ownership significantly enhances future firm performance. Overall, our findings validate the positive role of common ownership in corporate governance.     

Search,product market competition and CEO pay

We develop a market equilibrium model to show how search frictions in the CEO market, agency conflicts and product market characteristics interact to affect CEO market tightness, firm size and CEO incentive pay. The theory generates novel implications that link firms' product markets with CEO markets. Different determinants of competition—the entry cost, product substitutability, and market size—have contrasting effects on CEO market tightness, CEO pay and firm size. We also derive new predictions for the impact of product market risk on firm size and CEO incentive compensation. We show empirical support for several cross-sectional hypotheses derived from the theory for how CEO pay, CEO incentives, firm size and market tightness vary with product market characteristics.     

产品市场竞争、管理层权力与薪酬辩护

以2011~2014年我国 A 股上市公司为研究样本,基于薪酬辩护的视角,考察管理层权力对薪酬—业绩敏感性的影响以及产品市场竞争的监督约束作用。实证结果表明,企业高管利用手中权力获取超额薪酬、谋取私利的同时,会通过提升薪酬—业绩敏感性为自身薪酬进行辩护,形成薪酬契约合理有效的表象;产品市场竞争能够显著抑制企业高管的薪酬辩护行为,降低管理层权力对薪酬契约的影响和扭曲。     

Public Disclosure of Forward Contracts and Revelation of Proprietary Information

Financial executives of firms engaged in forward contracting have raised concerns that mandated disclosure of those contracts would reveal proprietary information to rival firms. This paper considers the basis for those concerns in the framework of a duopoly in which one privately informed producer enters the forward market prior to production. In choosing its forward position, the firm considers the effects of that position on the forward price and second stage product market competition with its rival. Two regimes are considered: mandated disclosure and no disclosure. Under the former, the contracting firm faces a tension between exploiting its information advantage in the forward market and attempting to influence the production decision of its rival. On average, in equilibrium, the contracting firm gains a first-mover advantage, but at the cost of revealing its private information to its rival and extracting less expected gains from uninformed forward market participants. In contrast, with no disclosure, the contracting firm cannot influence rival firm beliefs, but extracts more expected gains from its private information in both the forward and product markets. On balance, the contracting firm prefers no disclosure. Moreover, parameterizations exist such that the rival also prefers that regime. These findings explain the opposition of respondents to draft proposals of Statement of Financial Standards No. 133.     

All‐units discounts as a partial foreclosure device

We investigate the strategic effects of all‐units discounts (AUDs) used by a dominant firm in the presence of a capacity‐constrained rival. Due to the limited capacity of the rival, the dominant firm has a captive portion of the buyer's demand for the single product. As compared to linear pricing, the dominant firm can use AUDs to go beyond its captive portion by tying its captive demand with part of the competitive demand and partially foreclose its small rival. When the rival's capacity level is well below relevant demand, AUDs reduce the buyer's surplus.     

Strategic interaction of capital structures: A spatial econometric approach

In this article, we suggest an alternative setting for empirically examining firms' strategic interaction in choosing their capital structure. Following Lyandres (2006)'s theoretical model, this article explicitly focuses on how the competitive interaction in output market may induce a firm to take the rival firms' capital structure into account in deciding its own capital structure. It is also shown that the direction of such strategic response depends on whether the output market competition is in strategic substitutes or in strategic complements. A spatial regression model is introduced to test the relationship between firms' financial choices and their product market strategies. The empirical evidence suggests that inclusion of the spatially lagged term of a firm's leverage could be empirically significant in explaining the optimal choice of a firm's financial structure.     

Product market competition,competitive strategy,and analyst coverage

This paper examines how product market competition and strategic interactions among peer firms influence analyst coverage. First, we hypothesize that product market competition increases both the demand and supply of analyst coverage. Using three variations of industry concentration ratios and a firm specific measure of competition, we test and find a positive and significant effect of market competition on analyst coverage. Second, we explore an information transfer channel through which product market affects analyst coverage. We hypothesize that information flows more freely among firms selling similar products. Such information flows lowers analyst information collection and processing costs, which in turn increases analyst coverage. Using product similarity index developed by Hoberg and Phillips (J Polit Econ 124(5):1423–1465, 2016) to capture the effect of information transfer, we find that analyst coverage increases with product similarity. Third we examine the role of competitive strategy in analyst coverage. We split our sample into markets of strategic complements and strategic substitutes. We find that the effect of market competition and analyst coverage is more pronounced in markets where firms compete as strategic complements.     

Corporate social responsibility,industry concentration,and firm performance: Evidence from emerging Asian economies

Social and environmental performance are two pillars of corporate social responsibility that integrate the desires of firms to enhance their competitive advantages and demonstrate their commitment to society. Based on a sample of eight emerging Asian markets, this study investigates the role of firms’ social and environmental performance in their financial performance, and how this may vary under different levels of industry competition. The results show that the social dimension is more effective in increasing firm performance relative to the environmental dimension. Further, the performance of socially oriented firms is more stable in highly competitive industries relative to environmentally oriented firms. Overall, this study supports the view that socially responsible firms have a competitive edge over their rivals that leads to higher profitability.