Corporate Governance and the Creation of the SEC

Abstract

We study the effects of the creation of the Securities and Exchange Commission (SEC) on corporate governance. Established in 1934, the SEC effectively applied the listing standards of the NYSE to all regional stock exchanges in the U.S. We therefore examine the impact of the SEC by comparing non-NYSE listing firms before and after the landmark legislation was adopted, using the NYSE as a control group. Our estimates reveal that there was a 30% reduction in board independence, i.e., the creation of the SEC caused boards to become significantly less independent. We find no corresponding effects on firm valuations. Our evidence is consistent with a "substitution of governance mechanisms" hypothesis, i.e., firms endogenously trade off market-based (board) governance and government-sponsored (SEC) governance. This evidence has implications for corporate governance regulation around the world.

Keywords: corporate governance, SEC, Securities Act of 1933, financial regulation

JEL Classification: G3, K2, N2