The Effect of Strengthened Monitoring and Oversight Mechanisms on U.S. Firms Listed on NASDAQ

Abstract

Agency theory and conventional wisdom suggest that strengthened monitoring and oversight mechanisms are necessary to align the actions of management with the interests of shareholders, which should be to maximize shareholder wealth. In 2003, legislators and regulators strengthened corporate governance with a series of laws and regulations in response to a number of corporate scandals in the late 1990s. The purpose of this study is to determine how strengthened monitoring and oversight mechanisms affected the performance of U.S. companies listed with NASDAQ. In conjunction with the agency view and conventional wisdom, we expect strengthened corporate governance to reduce agency problems and costs and increase firm performance. We conducted the study with a sample of 381 firms and 5,005 firm-year observations from U.S. companies trading on NASDAQ over the period 1997-2012. We analyzed the data using a difference-in-difference methodology and found that most firms were not affected by the 2003 changes to NASDAQ rules. The results are consistent with the window-dressing view that suggests managers retained their influence over the board and appointed directors who technically met the new requirements but were sympathetic to management, giving the impression that changes were made.

Keywords: agency view; corporate governance; firm performance; monitoring; oversight; NASDAQ; difference-in-difference methodology; window-dressing view

DOI: 10.7176/RJFA/12-16-02

Publication date:August 31^st 2021