Does Regulation Substitute Or Complement Governance?

The relation between regulation and corporate governance remains an open debate in the literature. In this paper the authors implement a novel approach to test whether regulation substitutes for or is a complement to governance. Using data from initial public offerings, they 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. Finally, regulated firms do not significantly increase monitoring levels following deregulation. These findings support the hypothesis that regulation and governance are complements. The results are consistent with regulators pressuring firms to adopt effective monitoring structures.