Does regulation substitute or complement governance?

    Authors

    D. A. Becher;M. B. Frye

    Comments

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    Abbreviated Journal Title

    J. Bank Financ.

    Keywords

    Corporate governance; Regulation; IPO; INITIAL PUBLIC OFFERINGS; CORPORATE GOVERNANCE; EXECUTIVE-COMPENSATION; FIRM PERFORMANCE; CEO COMPENSATION; AIRLINE INDUSTRY; BOARD STRUCTURE; OWNERSHIP; DEREGULATION; DIRECTORS; Business, Finance; Economics

    Abstract

    We examine whether firms utilize governance systems and increased monitoring mechanisms when information asymmetry and managerial discretion are limited. Given that such monitoring is costly, we expect regulated firms to use less monitoring if regulation substitutes for governance. Using data from initial public offerings, we document that regulated firms have greater proportions of monitoring directors and larger boards as well as use similar amounts of equity-based compensation as non-regulated firms. Further, regulated and unregulated firms are analogous in terms of observed trade-offs between traditional monitoring mechanisms and insider ownership. Finally, regulated firms appear to decrease monitoring following a period of deregulation. These findings support the hypothesis that regulation and governance are complements and are consistent with the notion that regulators pressure firms to adopt effective monitoring structures. (C) 2010 Elsevier B.V. All rights reserved.

    Journal Title

    Journal of Banking & Finance

    Volume

    35

    Issue/Number

    3

    Publication Date

    1-1-2011

    Document Type

    Article; Proceedings Paper

    Language

    English

    First Page

    736

    Last Page

    751

    WOS Identifier

    WOS:000287059200019

    ISSN

    0378-4266

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