Changes in Corporate Governance: Externally Dictated vs Organically Determined

Abstract

Using the SEC regulations (following the Sarbanes–Oxley Act) on board independence as an identification for externally imposed governance changes, I compare its influence on firm performance to the effect of voluntarily conducted adjustments. Controlling for companies with voluntary changes, firms forced to modify their governance by increasing board independence experience a decrease in ROA, asset turnover, and sales growth. The findings are robust for other mandated provisions and stronger for bigger changes; small, single-segment firms operating in wholesale, retail, and high-tech industries; and constrained companies with financial distress, high leverage, low cash, high volatility, high growth and R&D expenses.

Keywords: imposed regulations, voluntary governance changes, firm performance, board independence, identification

JEL Classification: G32, G38, C33