Associations Between Internal and External Corporate Governance Characteristics and the Consequences of Regulating Governance Practices
William R. Baber
Georgetown University - Department of Accounting and Business Law
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.
Number of Pages in PDF File: 40
Keywords: corporate governance, governance regulation
JEL Classification: G34, G38, K22, M48
Date posted: June 17, 2008