Product Market Competition and Corporate Governance: Substitutes or Complements? Evidence from CEO Duality

This paper shows that firms in highly competitive industries can benefit from good corporate governance. I analyze the stock market reaction to CEO/chairman consolidation announcements, and find that the market reacts positively to these events if the announcing firm has strong governance within an industry of high product market competition. The benefit of CEO duality comes from efficiency gains by management, and is positively related to market competition. Only firms with strong governance can capture this benefit. Market reaction is negligible for firms with weak governance and for firms facing low levels of competition. Overall, my results suggest that product market competition and corporate governance are complements for firms desiring to gain managerial efficiency through granting its CEO additional power. My paper also provide evidence against potential one-size-fits-all policies aiming to mandate the separation of CEO and chairman roles.