Corporate Governance, Product Market Competition and Announcement Returns of Spinoff Firms

Lee-Hsien Pan (), Ying-Chou Lin, Meng-Jou Lu () and I-Min Lin ()
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Lee-Hsien Pan: School of Business, The State University of New York at Geneseo, New York, USA
Ying-Chou Lin: Department of Accounting and Finance, Southeastern Oklahoma State University, Durant, Oklahoma, USA
Meng-Jou Lu: Department of Finance, Asia University, Taichung, Taiwan
I-Min Lin: Department of Accounting, National Chengchi University, Taipei, Taiwan

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2021, vol. 24, issue 04, 1-40

Abstract: Our paper investigates the relationship between corporate governance (internal corporate governance mechanism) and announcement returns of spinoff firms, and examines whether such relationship can be explained by product market competition (external corporate governance mechanism). Using a sample of 269 completed spinoffs between 1983 and 2009, we find a nonlinear U-shaped relationship between corporate governance and the cumulative abnormal return around the announcement period. Moreover, we find that such a nonlinear relationship hinges on the level of competition in the market in which the spinoff firms operate. Specifically, we find that weak governance firms experience higher announcement period return only in highly competitive industries, while strong governance firms exhibit higher announcement period return, but only in moderately competitive industries. Our findings reconcile the mixed results in the literature regarding the relationship between corporate governance and firm value by examining the effect of product market competition on this relationship. Our results highlight the importance of product market competition as a moderator between corporate governance and the announcement period return of the spinoff firms.

Keywords: Competition; corporate spinoff; corporate governance (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1142/S0219091521500314

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