The two sides of the governance coin: competition and regulation

Abstract

We draw upon multiple theories of corporate governance to examine the effects of competition and regulation on firm-level corporate governance quality. We find that regulation enhances firm-level corporate governance and within-country convergence. Competition has a negative effect on corporate governance. The interactive effect of regulation and competition is negative on firm-level corporate governance. Furthermore, competition reduces within-country convergence. Internal, i.e., firm-level governance choices are significantly influenced by external (country-level) choices. This suggests that governance choices are likely to converge across countries while simultaneously diverging within countries. For example, while firms in the top governance score cluster of each country will be different from lower-scoring clusters of firms in the same country, the similarity of the competition-regulation environment in which they operate means that these firms are likely to be very similar to firms in the top governance clusters of other countries. Our paper makes two significant contributions. First, it provides an integrative view of corporate governance that incorporates factors contributing to the variation in corporate governance across countries. Second, we contribute to the debate on within- and crosscountry convergence of corporate governance. While some researchers pontificate on the eventual convergence of global corporate governance practices, others have their own doubts. The latter viewpoint is reinforced by studies on temporal convergence in corporate governance which reveal significant cross-country variation due to path-dependence in the evolution of corporate governance practices. We provide an economic argument, namely that competition detracts from within-country convergence in corporate governance.