Does Regulation Substitute or Complement Governance?

Journal of Banking and Finance, Forthcoming

50 Pages Posted: 25 Mar 2008 Last revised: 6 Sep 2010

See all articles by David Becher

David Becher

Drexel University

Melissa B. Frye

University of Central Florida - College of Business Administration

Date Written: August 20, 2010

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.

Keywords: Corporate Governance, Regulation

JEL Classification: G21, G22, G28, G34

Suggested Citation

Becher, David and Frye, Melissa, Does Regulation Substitute or Complement Governance? (August 20, 2010). Journal of Banking and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1108309 or http://dx.doi.org/10.2139/ssrn.1108309

David Becher (Contact Author)

Drexel University ( email )

3220 Market Street
1127 Gerri C LeBow Hall
Philadelphia, PA 19104
United States
215-895-2274 (Phone)
215-895-2295 (Fax)

Melissa Frye

University of Central Florida - College of Business Administration ( email )

P.O. Box 161400
Department of Finance
Orlando, FL 32816
United States
407-823-3097 (Phone)

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