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

40 Pages Posted: 17 Jun 2008  

William R. Baber

Georgetown University - Department of Accounting and Business Law

Lihong Liang

Syracuse University

Date Written: 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 Classification: G34, G38, K22, M48

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: https://ssrn.com/abstract=1146922 or http://dx.doi.org/10.2139/ssrn.1146922

William R. Baber (Contact Author)

Georgetown University - Department of Accounting and Business Law ( email )

McDonough School of Business
Washington, DC 20057
United States

Lihong Liang

Syracuse University ( email )

Whitman School of Management
Syracuse, NY 13244
United States

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