Did New Regulations Target the Relevant Corporate Governance Attributes?

Abstract

Recent corporate scandals have led to new governance rules that include the Sarbanes-Oxley legislation (SOX) and additional regulations by stock exchanges. This study examines the changes in corporate governance practices during 2001-2005, which covers the period before and after the new regulations. We analyze a comprehensive set of 64 governance attributes for more than 5,200 firms. Our findings indicate that corporate governance practices beyond those mandated by new regulations changed substantially over this period. We find statistically significant differences in governance across firm size and industries. After controlling for size and industry we find a positive and significant relation between governance and firm value. We find that new regulations are associated with higher firm value in firms that adopted the regulations prior to them being mandated. The results are statistically and economically significant. In this sense our findings suggest that the new regulations did target relevant governance attributes. However, the analysis also indicates that the markets were already rewarding firms that had better governance. Therefore, it is not clear that mandatory rules for all firms were required. Clearly the costs of imposing new regulations on certain types of firms, for example, small firms, were potentially too costly. In the post-regulatory period, as expected, the relationship between the regulatory governance attributes and firm value does not exist. We find that the positive relationship between governance attributes not mandated by regulations and firm value continues even in the post-regulatory period.

Keywords: Corporate governance, firm value, regulation

JEL Classification: G12, G18, G32, G38