Deregulation and the Adaptation of Governance Structures: The Case of the U.S. Airline Industry
Stacey R. Kole
University of Chicago - Booth School of Business
University of Pittsburgh - Finance Group
Simon School of Business Working Paper FR 97-05
Deregulation provides a natural experiment for examining how governance adapts to structural change in the business environment. We investigate the evolution of governance structure--ownership concentration, compensation policy, and board composition--in the U.S. airline industry during a 22- year period surrounding the Airline Deregulation Act of 1978. Consistent with theory, we find that after deregulation 1) equity ownership is more concentrated; 2) CEO pay increases; 3) stock option grants to CEOs increase; and 4) board size decreases. Airlines governance structures gravitate toward the system of governance mechanisms used by unregulated firms. The adaptation process is gradual, however, suggesting that it is costly to alter organizational capital. We also present evidence on the relation between governance structure and firm survival.
JEL Classification: G32, G38, L51, L93
Date posted: September 3, 1997