Explaining Corporate Governance: Boards, Bylaws, and Charter Provisions

We provide arguments and present evidence that corporate governance structures are endogenous responses to the costs and benefits firms face when they choose the mechanisms that comprise those structures. In particular, an industry's investment opportunities, product uniqueness, competitive environment, information environment, and leverage help explain its corporate governance. Examining groups of similar corporate governance mechanisms shows that firm and industry factors can have quite different associations (in strength and direction) with the monitoring capabilities of the board of directors versus the shareholder orientation of corporate charter provisions. Although industry factors play a dominant role in explaining an index of total governance, we find that firm and industry factors contribute almost equally in explaining the variation of sub-indices capturing aspects of board structure and charter provision use.