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Corporate Governance

Corporate Governance – Effective or Inefficient?
In the wake of the corporate sandals involving Enron and WorldCom at the start of the 21st century, public awareness incited a new era of corporate governance with the passage of the Sarbanes-Oxley Act. This legislation, in addition to further amendments to the stock exchange's regulations, was meant to prevent further misconduct by aligning the incentives of shareholders with those of management. In order to redirect the manager's interests, SOX alters corporate structures through changes in board composition, executive compensation, audit requirements and reporting standards. However, these regulations had an unanticipated affect on firms in the initial announcement period, creating a positive abnormal return in firms initially perceived as less compliant with the laws. Moreover, there is also ‘variation in response across firm size. Large firms that are less compliant earn positive abnormal returns but small firms that are less compliant earn negative abnormal returns, suggesting that some provisions are detrimental to small firms.' (c.g. and firm value 1) In addition to the affect on stockholders, the bond market is also significantly affected by the announcement. In the long run however, a series of recent studies have managed to ‘document negative relations between various indices of antitakeover provisions (ATPs) and both firm value and long-run stock return performance (c.g. and acquirer returns) It is of great economic importance that legislators and investors understand how these major corporate governance mechanisms operate as well as their affect on share-holder wealth, yet the results of many studies are ambiguous as to whether following these provisions actually leads to more effective monitoring and improved firm value.
Corporate governance is the set of guidelines, procedures and organizational and reporting structures that supervise the way a corporation is run. The principal entities and...