Product Market Competition, Corporate Governance, And Managerial Slack: Evidence from Trade Liberalization

Abstract

In this study we take an interdependent view of governance mechanisms and test the substitution perspective of the governance bundle. We hypothesize that an exogenous increase in product market competition, as an external mechanism, leads to a decrease in the level of shareholder rights in firms’ governance provisions, which is a type of internal governance mechanism. Furthermore, we argue that product market competition has a negative effect on managerial wasteful corporate activities aimed to increase their personal benefits (i.e., managerial slack). We obtain an exogenous change in product market competition by utilizing large tariff reductions of the year 2000 as a quasi-natural experiment. We find support for our theoretical arguments using a longitudinal panel of firms covering the years 1990- 2010 and applying a difference-in-differences model.