The Effects of Accounting and Financial Regulation on Corporate Governance

• DOI: http://doi.org/10.1111/corg.12175
• Date: 01 September 2016
• Published date: 01 September 2016
• Author: Alessandro Zattoni,Praveen Kumar

Editorial

The Effects of Accounting and Financial

Regulation on Corporate Governance

Praveen Kumar and Alessandro Zattoni

The corporate governance (CG) literaturehas long empha-

sized the distinction between the effects of external and

internal factors on corporate governance performance of

firms. In particular,the impact of the external legal, regulatory

and institutional environment on firm level corporate gover-

nance performance attracts much attention. Corporate Gover-

nance: An International Review has been at the forefront of

developing this area (e.g., Kumar & Zattoni, 2013, 2014,

2015b, 2016).An important implication of this literature is that

corporate governance performance in various countries is

dynamic and determined, once and for all, by just a few

broad (and static) national governance factors. In fact, this

literature is now sufficiently advanced and mature to offer

novel results on the effects of specific forms of regulation

(Kumar & Zattoni, 2015a).

The four papers in thisissue extend significantly our knowl-

edge of the effects of financial and accounting regulation on

firm-level corporate governance. This type of regulation af-

fects corporate governance along a variety of dimensions,

mediating both the effects of internal and external factors.

For example, accounting and financial regulation influences

internal factors by changing the incentives for capital invest-

ment; disclosinginternal informationto external stakeholders;

and modifying executive compensation plans. Meanwhile,

such regulation affects external factors by, for example, modi-

fying the incentives for external monitoring and takeovers

(Manne, 1965; Shleifer & Vishny, 1986); enforcing debt con-

tracts (Aslan & Kumar, 2014; Vig, 2013); and favoring changes

in ownership structures (Cuomo, Zattoni, & Valentini, 2013).

In the first paper, Lee and Chungexamine the mediating in-

fluence of antitakeover regulation (or antitakeover statutes)

on the external disciplining role of the market for corporate

control for entrenched managers. The early CG literature, as

exemplified by Berle and Means (1932), was skeptical that in-

ternal institutions such as boards and/orexternal shareholder

pressure could ameliorate the agency problem from the

separation of management and control. However, the later

literature, at least in the Anglo-Saxon context (Manne, 1965),

highlighted the role of external factors, principally through

an active marketfor corporate control that coulddiscipline in-

efficient management by targeting underperforming firms

(Shleifer & Vishny, 1986). Notably, this literature initially

viewed external takeover market discipline and internal fac-

tors as substitutes (Cyert, Kang, & Kumar, 2002); that is, a

strong marketfor corporate control cansubstitute for weak in-

ternal governance mechanisms. However, the more recent lit-

erature showsthere is a complex interaction betweenexternal

pressure and internal governance (Kumar & Zattoni, 2013;

Schiehll, Ahmadjian, & Filatotchev, 2014). By comparing the

internal governance mechanisms of firms in US states with

or without antitakeover statutes (ATS) (or states that allow

firms to opt out of ATS), Lee and Chung present novel evi-

dence consistent with the view that internal corporate gover-

nance and the market for corporate control are complements.

Specifically, they find that firms in states that are more ex-

posed to takeover threats –i.e., firms that legally cannot, or

choose notto, protect themselves usingATS –have stronger in-

ternal governancemechanisms compared with firms in states

that protect them from takeover threats due to ATS. Lee and

Chung further reinforce their findings by showing that firms

strengthen their internal corporate governance mechanisms

when states abolish existing ATS. The paper’sfindings raise

the intriguing possibility that exposure to takeover threats

can exacerbate managerial agency problems, such as myopic

behavior to forestall external threats, requiring stronger inter-

nal governance mechanisms. It could also be the case that

firms with weak internal governance mechanisms ceteris

paribus face greater takeover threats. The results of this paper

open a number of interesting directions for future research.

The second paper, by Nagar and Sen, examines the differ-

ence between family and non-family firms in terms of the

quality of reporting of cash flows; how this difference itself

varies across two countries (India and the US); andhow these

variationsare moderated by accounting and relatedcorporate

governance regulations. Among the principal findings of the

paper is that regulation has differential impact on the quality

of cash flow reporting across the two countries. Specifically,

they find that both family and non-family firms responded

© 2016 JohnWiley & Sons Ltd

doi:10.1111/corg.12175

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Corporate Governance: An International Review, 2016, 24(5): 466–467