Concentrating on Governance

This paper develops a novel trade‐off view of corporate governance. Using a model that integrates agency costs and bargaining benefits of management‐friendly provisions, we identify the economic determinants of the resulting trade‐offs for shareholder value. Consistent with the theory, our empirical analysis shows that provisions that allow managers to delay takeovers have significant bargaining effects and a positive relation with shareholder value in concentrated industries. By contrast, non‐delay provisions have an unambiguously negative relation with value, particularly in concentrated industries. Our analysis suggests that there are governance trade‐offs for shareholders and that industry concentration is an important determinant of their severity.