Smith and Colleague to Study “Corporate Governance in a Free Contracting Environment”

Dec. 12, 2007 — What would corporate governance structures look like in the absence of statutory law and regulation? When laws or regulations are first introduced, what are the effects? How is firm performance altered? Do well-meaning regulations actually reduce fraud and mismanagement and help protect investors, or do they simply create onerous and expensive compliance requirements?

These are some of the questions that University of Virginia finance professor David C.
Smith and Charlotte Ostergaard of the Norwegian School of Management and the Central Bank of Norway will investigate over the next three years, thanks to $60,000 in annual research funding from the Norwegian Research Council.
 
What does Norway have to do with any of this? Until 1910, Norwegian businesses — in sharp contrast to those in virtually every other industrialized nation — operated in an environment of near-complete contracting freedom, devoid of corporate law. Looking at corporate governance structures in Norway prior to 1910, then, affords Smith and Ostergaard the opportunity to look at a set of circumstances that, in America and Western Europe, are strictly theoretical. “It’s really more like being an archaeologist,” Smith says.

Smith says that his study will help to increase our understanding of corporate governance today in two important ways. First, he says, “we can study the effectiveness of company-level corporate governance — for instance, the impact of different board structures on firm behavior — without the interference of federal and state regulations.” Second, he says, “By studying how our sample firms respond to Norway’s first corporate law in 1910, we obtain a clean test of the effects of regulation on corporate performance.”