Governance and firm value: The effect of a recession

• The macroeconomic environment has a substantial effect on its governance structure.
• Both industry turnover and managerial entrenchment rise during a recession.
• Industry turnover and managerial entrenchment have opposite impacts on firm value.
• The negative impact of entrenchment outweighs the positive impact of turnover.
• A recession presents an opportunity for managers to extract more private benefits.

This paper examines the relationship between the firm's governance structure and its value during different economic conditions. We show that both relative industry turnover and CEO entrenchment increase during economic downturns. We also find that relative industry turnover and managerial entrenchment have opposite impacts on the value of the firm throughout the recessionary period. While industry turnover leads to an appreciation in firm value, managerial entrenchment reduces shareholders’ wealth. The negative impact of managerial entrenchment on firm value, however, outweighs the positive impact of industry turnover. Accordingly, we propose that a recession provides managers with a good opportunity to camouflage their behavior and extract more private benefits and, thus, blame the poor performance on bad economic conditions.