I am currently constructing governance index and entrenchment index using PCA. The literature on governance and entrenchment indexes constructions randomly chose serval corporate governance variables ( generally, board composition and CEO characteristics...). However, this seem to be conflated. Could anyone advise of the differences between governance index and entrenchment index in corporate governance literature Please?
Dear Aymen Ammari
Greetings,
Please , see the attached file about your topic may be useful for you.
Best Regards
Both are indexes based on a set of informations regarding the “quality” of corporate governance. The original data is provided in the corporate governance database by Riskmetrics (Now ISS).
The corporate governance Index (See details in Gompers, Paul A., Joy L. Ishii, and Andrew Metrick "Corporate Governance and Equity Prices", The Quarterly Journal of Economics 118 (1), February 2003, 1007-155.) is based on the whole set of corporate governance characteristics (23 ítems, if I rememerber correctly) included in this database, while the Entrenchment index is based only 6 of these characteristics. Four limitations to large shareholders' power (staggered boards, limits to shareholder bylaw amendments, supermajority requirements for mergers, and supermajority requirements for charter amendments), and two takeover defences (poison pills and golden parachutes).
Information in E index
Classified Board
Golden Parachutes
Poison Pill
Supermajority - mergers in percent
Vote % Required to Amend ByLaws
Vote % Required to Amend Charter
To see the list of ítems in the corporate governance index you can check Table 1 in page 15:
Bebchuk, L., Cohen, A., & Ferrell, A. (2009). What matters in corporate governance?. Review of Financial studies, 22(2), 783-827.
Regards
Carlos Fernández
Attached is a paper by Kent and Zunker (2013) that attempts to create a governance score. See if it is useful:
Hi,
I quite agree with the previous colleagues answering your question. But it seems to me that entrenchment should also be related to the CEO choosing friends as members of the board of directors, and complexifying the structure of the company (undertaking diversification for example). Maximising the value of the firm is then no more at stake, but priority is given to extracting private benefits, and keeping the reins of the company as long as possible. Thus leverage of the firm must not be too important to be insulated from default risk. The age of the CEO may be near or over 60 years old also. Even if there is a penalty concerning the CEO's reputation, the choice is done to behave like that. You may have a look to this paper:
Executive Pay, Hidden Compensation and Managerial Entrenchment
Camelia M. Kuhnen, Jerey Zwiebel, July 2008
https://www.kellogg.northwestern.edu/accounting/papers/Kuhnen.pdf
best regards
Thanks for all your answer,
Patrick Navatte, can u please tell me where can i find an information about these 6 variables and how can i collect them PLZ, i work on the French listed firms (SBF120) panel data from 2001 to 2013 and i saw annuel reports but did not find them:
Classified Board
Golden Parachutes
Poison Pill
Supermajority - mergers in percent
Vote % Required to Amend ByLaws
Vote % Required to Amend Charter
Hi,
I think it will be very difficult to collect these data, except in a hand collected way reading with great care the financial reports of companies. I am not sure that you will not have to check the corporate charter for some of them. You can also to check some data on the AMF website, but I am not not confident that you will be able to document your database correctly.. Perhaps you may find something on Bloomberg database. Governance data are well documented for US firms but not yet for french firms....sorry!
best regards
Hi,
You may have a look to this recent paper:
Political capital and CEO entrenchment: Evidence from CEO turnover in Chinese non-SOEs
Journal of Corporate Finance, February 2017, Pages 1-14
Xiaping Cao, Xiaofei Pan, Meijun Qian, Gary Gang Tian
Best regards.
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