A recent CLS blog post by Martijn Cremers, Saura Masconale and Simone M. Sepe illustrates a recurring problem with empirical legal scholarship: First, it can only provide answers if the question involves something you can count. Second, how you count that something maters a lot.
In the past 20 years, many corporate law scholars have come to the view that governance arrangements protecting incumbents from removal are what really matter for firm value, arguing that such arrangements help entrench managers and harm shareholders. A major factor supporting this view has been the rise of empirical studies using corporate governance indices to measure a firm’s governance quality. Providing seemingly objective evidence that protecting incumbents from removal reduces firm value, these studies have encouraged the idea that good corporate governance is equivalent to stronger shareholder rights.
In our recent article, we challenge this idea, presenting new empirical evidence that calls into question prior studies that rely on corporate governance indices and developing a novel theoretical account of what really matters in corporate governance.
In revisiting the results of these studies, we focus on the entrenchment index or E-Index, introduced in 2009 by Lucian Bebchuk, Alma Cohen, and Allen Ferrell (BCF). The E-Index provides evidence that six entrenchment provisions matter the most for firm value: staggered boards, poison pills, golden parachutes, supermajority requirements for charter amendments, supermajority requirements for bylaw amendments, and supermajority requirements for mergers. As of March 2017, over 300 empirical studies have used the E-Index as a measure of governance quality, suggesting that this index has become a standard reference to define entrenchment and, hence, “bad” governance. Yet, in estimating the association between the E-Index (and each of its six constituent components) and firm value, BCF only relied on a 12-year period (from 1990 to 2002). We rely on a much more comprehensive dataset over a much longer period (from 1978 to 2008), allowing for a more robust statistical analysis of the association between corporate governance and firm value.
Our empirical findings call into question the kitchen sink approach to incumbent protection from removal adopted by the E-index.
But doesn't it also call into question the whole exercise? What if a data set running from 1960 to 2010 produced still different results? Bah, humbug.
