This study uses Japanese firm data to empirically test the “quiet life hypothesis,” which predicts that managers who are subject to weak monitoring from shareholders avoid making difficult decisions such as risky investment and business restructuring. We employ cross-shareholder and stable shareholder ownership as the proxy variables of the strength of a manager’s defense against market disciplinary power. We examine the effect of the proxy variables on manager-enacted corporate behaviors and the results indicate that entrenched managers who are insulated from the disciplinary power of the stock market avoid making difficult decisions such as large investments and business restructures. However, when managers are closely monitored by institutional investors and independent directors, they tend to be active in making difficult decisions. Taken together, our results are consistent with the managerial quiet life hypothesis.
Posted by Naoshi Ikeda, Kotaro Inoue, and Sho Watanabe, Tokyo Institute of Technology , on Tuesday, September 26, 2017
Editor's Note: Naoshi Ikeda is Assistant Professor, Kotaro Inoue is Professor, and Sho Watanabe is a Research Student at Tokyo Institute of Technology’s School of Engineering. This post is based on a recent paper by Professor Ikeda, Professor Inoue, and Mr. Watanabe. Related research from the Program on Corporate Governance includes The Costs of Entrenched Boards by Lucian Bebchuk and Alma Cohen; and What Matters in Corporate Governance? by Lucian Bebchuk, Alma Cohen and Allen Ferrell (discussed on the Forum here).