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Will Deregulation Affect the Structure of Corporate Governance? -- Evidence from the Deregulation of U.S. Trucking and Telecommunication Industries . I- Ju Chen ( 陳一如 ) , Yuan- Ze University, Taiwan . 2012 National Taiwan University

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I ju chen yuan ze university taiwan

Will Deregulation Affect the Structure of Corporate Governance?

-- Evidence from the Deregulation of U.S.

Trucking and Telecommunication Industries

I-Ju Chen (陳一如), Yuan-Ze University, Taiwan

2012 National Taiwan University

International Conference on Finance, 2012/12/07


Motivation
Motivation Governance?

  • Literature shows that deregulation tends to affect governance structure that inclines to align the managerial interests with shareholders’ (Hambrick and Finkelstein, 1987; Kole and Lehn, 1997; Lehn, 2002; Kim and Prescott, 2005; Ovtchinnikon, 2010).

    • Market competition

    • Induce managerial incentives

  • Two issues have not been considered:

    • Market for corporate control

    • Generality


Motivation two issues have not been considered
Motivation Governance? -Two issues have not been considered

  • Market for corporate control

    • Substantial mergers activities occur during the period of deregulation (Winston, 1998) -- market competition

    • A substitute: act as the managerial incentive scheme (Holmstrom, 1982; Hart, 1983; Nalebuff and Stiglitz, 1983; Schmidt, 1997)

      • Higher competition => easier to align managerial interests with shareholders => use less takeover defenses

    • A complement: (Titman, 1984; Klemperer, 1987; Chevalier and Scharfstein, 1996; Cremers, Nair, and Peyer, 2008).

      • Higher competition => exacerbate the potential owner-manager agency problem/with stronger incentives to protect their stakeholders’ benefits => employee stronger anti-takeover provisions

  • What is the effect of deregulation to the change in market for corporate control?


Motivation two issues have not been considered1
Motivation Governance? -Two issues have not been considered

  • Generality

    • Industries per se are different (Winston, 1998; Kim and Prescott, 2005).

    • Does the effect of deregulation in one industry apply to the other industries?


Research questions
Research Questions Governance?

  • Will governance structure changes after deregulation?

  • Will product market competition cause the changes in governance structure?

  • What are the association among deregulation, market competition, and changes in governance structure?



Empirical results
Empirical results Governance?

  • Deregulation

    • not necessarily lead firms to adopt governance structures that better control owner-manager agency conflict,

    • nor lead to competition increases which help closer alignment of manager-owner incentives.

  • The effect of product market competition

    • not always increase after deregulation.

  • The change in operating performance for both deregulated industries links to the adjustment of governance structure during the deregulation period.


Contributions
Contributions Governance?

  • Supplement to the governance literature

    • address the impact of market competition to governance structure in different industries after deregulation

    • dynamic relationship between governance structures and changes in business environment

  • Clarify the role of market competition in the design of governance mechanisms

    • a substitute (Holmstrom, 1982; Hart, 1983; Nalebuff and Stiglitz, 1983; Schmidt, 1997)

    • a complement (Delmas and Tokat, 2005; Kim and Prescott, 2005; Rennie, 2006; Karuna, 2008)

    • our study: a complement (in telecommunication industry)





The illustration of test period
The illustration of test period Governance?

Trucking industry: Trucking Industry and Regulatory Reform Act in 1994;

Telecommunication industry: Telecommunication Act in 1996


I ju chen yuan ze university taiwan
The Distribution of Sales Revenues and Herfindahl-Hirschman Index (HHI) of Trucking and Telecommunication Industries from 1976 to 2008.

HHI of trucking ind. ↑=> competition ↓

HHI of telecom ind. ↓=> competition ↑


Empirical evidences will governance structures change after deregulation
Empirical Evidences Index (Will Governance Structures Change after Deregulation?

Dumde: a deregulation dummy; capture changes in Gov


I ju chen yuan ze university taiwan

Empirical Evidences Index (Will Governance Structures Change after Deregulation?

15

  • The governance structures of both deregulated industries change after deregulation.

  • The ways they adjust governance structures in response to the dynamics of business environment after deregulation are different.


I ju chen yuan ze university taiwan

Empirical Evidences Index (

Will Product Market Competition Cause the Changes in Governance Structure?

  • The product market competition in telecommunication industry significantly affects the governance structure post deregulation.

  • The product market competition won’t significantly affect the governance structure in trucking ind.


Empirical evidences the association among deregulation hhi and changes in governance structure
Empirical Evidences Index (The Association among Deregulation, HHI, and Changes in Governance Structure.

HHI: the Herfindahl-Hirschman index; sum of the squared fraction of industry sales by all firms in the three-digit SIC industry.


I ju chen yuan ze university taiwan

Empirical Evidences Index (The Association among Deregulation, HHI, and Changes in Governance Structure.


Empirical evidences the association among deregulation hhi and changes in governance structure1
Empirical Evidences Index (The Association among Deregulation, HHI, and Changes in Governance Structure.

  • The product market competition in telecommunication industry significantly affects the governance structure post deregulation and the general governance structure improves as increases in product market competitions.

  • We, however, do not find sufficient evidence that product market competition improve general governance structure of trucking firms post deregulation.


Empirical evidences the association among deregulation hhi and overall governance structure
Empirical Evidences Index (The Association among Deregulation, HHI, and Overall Governance Structure.

  • The Dumde is significantly negative, indicating

  • governance structure becomes worse after deregulation.

  • HHI is significantly negative, indicating that governance

  • structure improvesas the increase in market competition.

  • Taken together, market competition complements governance structure of telecommunication firms.


I ju chen yuan ze university taiwan

Empirical Evidences Index (

The Association among Deregulation, HHI, and Overall Governance Structure.


Empirical evidences operating performance

Empirical EvidencesOperating Performance


Conclusions
Conclusions Index (

  • Deregulation itself , not product market competition in trucking industry, does change the governance characteristics in some sense.

  • Only evidence from telecommunication industry supports complement-effect hypothesis.

  • The effect of product market competition to governance structure changes after deregulation is also associated with:

    • magnitude of market competition,

    • industry idiosyncratic factors, etc.



Purpose
Purpose Index (

  • Market for corporate control

    • antitakeover provision + market competitions

  • Generality

    • two industries with different magnitude of deregulation

      • Trucking industry: quick and relatively complete

      • Telecommunication industry: slow and narrow