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Does regulation substitute or complement governance?

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  • Becher, David A.
  • Frye, Melissa B.

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.

Suggested Citation

  • Becher, David A. & Frye, Melissa B., 2011. "Does regulation substitute or complement governance?," Journal of Banking & Finance, Elsevier, vol. 35(3), pages 736-751, March.
  • Handle: RePEc:eee:jbfina:v:35:y:2011:i:3:p:736-751
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    2. Chahine, Salim & Goergen, Marc, 2013. "The effects of management-board ties on IPO performance," Journal of Corporate Finance, Elsevier, vol. 21(C), pages 153-179.
    3. Liang, Hsin-Yu & Chen, I-Ju & Chen, Sheng-Syan, 2016. "Does corporate governance mitigate bank diversification discount?," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 129-143.
    4. Shen, Chung-Hua & Lin, Chih-Yung & Wang, Yu-Chun, 2015. "Do strong corporate governance firms still require political connection, and vice versa?," International Review of Economics & Finance, Elsevier, vol. 39(C), pages 107-120.
    5. Amedeo Pugliese, 2014. "Alessandro Zattoni and William Judge (eds): IPOs around the world: a review of Corporate Governance and Initial Public Offerings—An International Perspective," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 18(4), pages 1161-1168, November.
    6. Tsai, Jeng-Yan & Lin, Jyh-Horng, 2012. "A contingent claim analysis of sunflower management under board monitoring and capital regulation," International Review of Financial Analysis, Elsevier, vol. 21(C), pages 1-9.
    7. Pugliese, Amedeo & Minichilli, Alessandro & Zattoni, Alessandro, 2014. "Integrating agency and resource dependence theory: Firm profitability, industry regulation, and board task performance," Journal of Business Research, Elsevier, vol. 67(6), pages 1189-1200.
    8. García-Meca, Emma & García-Sánchez, Isabel-María & Martínez-Ferrero, Jennifer, 2015. "Board diversity and its effects on bank performance: An international analysis," Journal of Banking & Finance, Elsevier, vol. 53(C), pages 202-214.
    9. Carlo Cambini & Sara De Masi & Laura Rondi, 2013. "Incentive Compensation and Incentive Regulation: Empirical Evidence," IEFE Working Papers 58, IEFE, Center for Research on Energy and Environmental Economics and Policy, Universita' Bocconi, Milano, Italy.
    10. Lerong He & Rong Yang, 2014. "Does Industry Regulation Matter? New Evidence on Audit Committees and Earnings Management," Journal of Business Ethics, Springer, vol. 123(4), pages 573-589, September.
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    14. Melanie de Waal & Floor Rink & Janka Stoker, 2015. "How internal and external supervisors influence employees' self-serving decisions," DNB Working Papers 464, Netherlands Central Bank, Research Department.
    15. Fang, Junxiong & Shi, Haina & Xu, Haoping, 2012. "The determinants and consequences of IPOs in a regulated economy: Evidence from China," Journal of Multinational Financial Management, Elsevier, vol. 22(4), pages 131-150.
    16. Nogata, Daisuke & Uchida, Konari & Goto, Naohisa, 2011. "Is corporate governance important for regulated firms' shareholders?: Evidence from Japanese mergers and acquisitions," Journal of Economics and Business, Elsevier, vol. 63(1), pages 46-68, January.

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    Corporate governance Regulation IPO;

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