Does regulation substitute or complement governance?
David A. Bechera,b, Melissa B. Fryec,*
aDepartment of Finance, Drexel University, Philadelphia, PA 19014, USA
bWharton Financial Institutions Center, University of Pennsylvania, Philadelphia, PA
bDepartment of Finance, University of Central Florida, Orlando, FL 32816, USA
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 Classification: G21; G22, G28; G34
We thank Michelle Lowry, Laura Field, Harold Mulherin, David Reeb, Chad Zutter, and seminar
participants at the 2007 Financial Management Association meetings for helpful comments and
suggestions. We also thank Kinjal Desai for his research assistance.
*Corresponding author. Tel: +1-407-823-3097; Fax: + 1-407-823-6676;
E-mail address: firstname.lastname@example.org.
The literature on corporate governance is somewhat enigmatic on the relation between
regulation and governance. Some stud