Corporate Governance and the Creation of the SEC

41 Pages Posted: 20 Sep 2014 Last revised: 16 Mar 2015

See all articles by Arevik Avedian

Arevik Avedian

Harvard University

Henrik Cronqvist

Chapman University - The George L. Argyros School of Business & Economics

Marc Weidenmier

Claremont McKenna College - Robert Day School of Economics and Finance; National Bureau of Economic Research (NBER)

Date Written: March 2, 2015

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

Suggested Citation

Avedian, Arevik and Cronqvist, Henrik and Weidenmier, Marc D., Corporate Governance and the Creation of the SEC (March 2, 2015). Swedish House of Finance Research Paper No. 15-03, Available at SSRN: https://ssrn.com/abstract=2498007 or http://dx.doi.org/10.2139/ssrn.2498007

Arevik Avedian

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

Henrik Cronqvist (Contact Author)

Chapman University - The George L. Argyros School of Business & Economics ( email )

333 N. Glassell
Orange, CA 92866
United States

Marc D. Weidenmier

Claremont McKenna College - Robert Day School of Economics and Finance ( email )

500 E. Ninth St.
Claremont, CA 91711-6420
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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