When regulations recede: Corporate governance and the divergent performance of firms

This paper investigates how corporate governance affects firm responses to deregulation. Using China's administrative approval reform as a quasi-natural experiment, we find that deregulation improves firm performance on average. However, the size—and even the direction—of these effects depends critically on corporate governance. Firms with dispersed ownership or high ESG governance ratings realize substantial improvements, whereas weakly governed firms benefit little, if at all. Family firms, as a distinct governance form, are particularly vulnerable: founder-led firms exhibit no discernible gains, and successor-led firms experience significant performance declines. Evidence on mechanisms shows similar heterogeneity in expense reductions and returns on capital. The effects also extend to the capital market—well-governed firms face lower stock price crash risk following deregulation. Overall, deregulation appears to amplify governance-based differences: strong governance converts regulatory relief into efficiency gains, while weak governance dissipates or even reverses them. By identifying firm-level channels behind these divergent outcomes, the study advances the deregulation literature and underscores governance as a key determinant of institutional change.