Did New Regulations Target the Relevant Corporate Governance Attributes?

Recent corporate scandals have led to new governance rules by the United States Congress as well as 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. After controlling for size and industry a positive and significant relation between governance and firm value is found. We find that new regulations are associated with higher firm value for firms that adopted the regulations prior to them being mandated. 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. Finally, we find that the positive relationship between governance attributes not mandated by regulations and firm value continues even in the post-regulatory period which supports the argument of the impact of quality of governance on firm value.