Corporate Governance and Market Reactions to

In this paper we analyze the effectiveness of corporate governance mechanisms in motivating managers to make value-increasing capital and R&D investment decisions. We classify corporate governance mechanisms into two broad categories (board and compensation/ownership governances) and examine whether market reactions to capital and R&D investment announcements vary with firm-level governance mechanisms. Our results show that firms with superior compensation/ownership governance mechanisms experience greater abnormal returns upon capital investment announcements, while firms with superior board governance mechanisms experience greater abnormal returns upon R&D investment announcements. We interpret these results as evidence that the effectiveness of corporate governance mechanisms in motivating managers to pursue worthwhile investments vary with the natures of investment projects