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Corporate governance, investment bandwagons and overcapacity: an analysis of the worldwide petrochemical industry, 1975–95
Author(s) -
Henderson James,
Cool Karel
Publication year - 2003
Publication title -
strategic management journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 11.035
H-Index - 286
eISSN - 1097-0266
pISSN - 0143-2095
DOI - 10.1002/smj.302
Subject(s) - bandwagon effect , corporate governance , free cash flow , business , shareholder , shareholder value , financial system , cash , cash flow , investment (military) , economics , industrial organization , finance , politics , political science , law
Previous research has provided conflicting arguments and evidence on which corporate governance system—bank based or market based—is better in preventing managers from investing in value‐destroying projects. This paper attempts to further the debate by comparing the effect of these different corporate governance systems on preventing capacity expansion bandwagon behavior in the worldwide petrochemical industry in the period 1975–95. Our study shows, first, that neither system is particularly effective in curbing overinvestment; however, the market‐based system seems to be less ineffective than the bank‐based system. Second, free cash flow appears to drive greater bandwagon behavior in the market‐based system than in the bank‐based system. Finally, within the bank‐based system, companies that rely on one bank–shareholder are more likely to join the bandwagon than those with more than one. Copyright © 2003 John Wiley & Sons, Ltd.