#08-16
Does Regulation Substitute or Complement Governance?
David A. Becher and Melissa B. Frye, February 2008
Abstract:The relation between regulation and corporate governance remains an open debate in the
literature. In this paper we implement a novel approach to test whether regulation substitutes for
or is a complement to governance. Using data from initial public offerings, we document that
regulated firms have greater proportions of monitoring directors and larger boards as well as use
similar levels of equity-based compensation as non-regulated firms. Further, regulated and
unregulated firms are analogous in turns of observed trade-offs between traditional monitoring
mechanisms and inside ownership. Finally, regulated firms do not significantly increase
monitoring levels following deregulation. These findings support the hypothesis that regulation
and governance are complements. Our results are consistent with regulators pressuring firms to
adopt effective monitoring structures.
Keywords: Corporate Governance; Regulation
JEL classifications: G21; G22, G28; G34
