Explaining the Relationship between Product Market Competition and Corporate Governance

Abstract

This paper examines the relationship between the degree of competition a firm faces and its corporate governance, given that product market competition acts as an external mechanism for corporate governance. The sample consists of 212 companies listed in the Tehran Stock Exchange (TSE) during the period of 1386-1391. A multi-dimensional approach has been taken to measure corporate governance, and two indicators are used to measure product market competition. The result shows that firms in competitive industries or with low market power have weak corporate governance structure. This result is robust after controlling firm-specific variables, and using various competition measures at firm level. The findings suggest that product market competition has a substantial effect on corporate governance, and that product market competition could be regarded as substitute for corporate governance quality. Furthermore, the result reveals that disaggregating the corporate governance measure into more components causes the explanatory power of the models decreasing and the results being insignificant

Keywords

• corporate governance
• procuct market competition
• multi-dimensional index
• herfindal index
• lerner index