Regulation, shareholder rights and corporate governance: an empirical note

Abstract

We investigate the impact of regulation on shareholder rights and corporate governance. We gauge the strength of shareholder rights by measuring the number of restrictive governance provisions that suppress shareholder rights – the more restrictive the governance, the weaker the shareholder rights. We find that financial firms have less restrictive corporate governance, suggesting that financial regulations promote shareholder rights. On the other hand, regulation does not seem to impact shareholder rights in the utility industry.

Notes

¹The IRRC collects data only periodically and our sample is, therefore, restricted to years in which the IRRC has data. The IRRC has data for 1993, 1995, 1998, 2000 and 2002, and these are the years that we use in our study. The IRRC does not have governance data for 1994, 1996, 1997, 1999 and 2001, so we do not include these years in our study.

²The 24 provisions examined include anti-greenmail, blank check preferred stock, business combination laws, bylaws and charter amendment limitations, classified board, compensation plans with change in control provisions, director indemnification contracts, control share cash-out laws, cumulative voting requirements, director's duties, fair price requirements, golden parachutes, director indemnification, limitations on director liability, pension parachutes, poison pills, secret ballot, executive severance agreements, silver parachutes, special meeting requirements, supermajority requirements, unequal voting rights and limitations on action by written consent.

³Commercial banks are known to be highly leveraged. However, the vast majority of financial firms in our sample are not commercial banks. This is why the average debt ratio for the financial subsample is low. The largest group in the financial subsample consists of insurance companies (52.15%).

⁴We perform the analysis using ordinary least squares, because the GINDEX has very little variation across time. Panel regressions produce qualitatively similar results.

⁵Two major regulations were passed in the 1990s that affected the financial industry. In 1994, Congress passed the Interstate Banking and Branching Efficiency Act (otherwise known as the Riegle-Neal Act), which permitted bank holding companies to acquire banks in other states. In 1999, Congress passed the Financial Services Modernization Act, which eliminated restrictions on banks, insurance companies and securities firms entering into each others' areas of businesses. These two regulations may have implications for our analysis. Therefore, we create two time dummy variables, one that differentiates between the periods before and after 1994 and one before and after 1999. We, then, create interaction terms with these two time dummy variables and with the financial dummy variable and include the interaction terms in the regression analysis (results not shown). The estimated coefficients for the interaction terms are not statistically significant. Thus, the two major regulations passed in the 1990s do not appear to materially impact shareholder rights and corporate governance in the financial industry in our analysis.