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Associations Between Internal and External Corporate Governance Characteristics and the Consequences of Regulating Governance Practices

William R. Baber
Georgetown University

Lihong Liang
Syracuse University


June 2008


Abstract:     
We characterize the corporate governance system as a portfolio of external and internal governance procedures that addresses firm-specific governance problems. External governance consists of statutory and contractual provisions that determine the costs of active shareholder participation in the management process. Internal governance concerns interaction between firm management and Boards of Directors. The evidence suggests that external and internal corporate governance mechanisms function as substitutes. Further analysis indicates that associations between internal and external governance characteristics are less substantial after than before recent corporate governance regulation. Moreover, we find that provisions that weaken external governance are more likely in firms where increases in internal governance are substantial. Such evidence raises questions regarding the consequences of corporate governance legislation such as that imposed by the 2002 Sarbanes Oxley Act.

Keywords: corporate governance, governance regulation

JEL Classifications: G34, G38, K22, M48

Working Paper Series

Date posted: June 17, 2008 ; Last revised: July 29, 2008

Suggested Citation

Baber, William R. and Liang, Lihong, Associations Between Internal and External Corporate Governance Characteristics and the Consequences of Regulating Governance Practices (June 2008). Available at SSRN: http://ssrn.com/abstract=1146922


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Contact Information

William R. Baber (Contact Author)
Georgetown University ( email )
3700 O Street, NW
Washington, DC 20057
United States
Lihong Liang
Syracuse University ( email )
Whitman School of Management
Syracuse, NY 13244
United States
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