Boards, CEOS, and Surviving a Financial Crisis : Evidence from the Internet Shakeout

We examine whether corporate governance matters for firms facing financial distress by investigating the failure rate of Internet firms after the Internet shakeout. We theorize that financial crisis changes the relative costs and benefits of governance mechanisms. As a result, we suggest that more independent and smaller boards become more valuable in distressed firms that are more in need of rapid strategic action. We further hypothesize that, as financial distress increases, CEO power becomes increasingly beneficial as the concentrated power allows the firm to move more decisively. Event-history analysis of the failure of publicly traded Internet firms over the period 2000-2002 confirms our hypotheses. Our results suggest that the association between governance and survival depends on firm and environmental context and that governance mechanisms should be assessed in samples in which the specific mechanisms are likely to be important, rather than in broad samples, and that future research should attend to these considerations