The effect of deregulation on internal control of agency conflict: Evidence from the electric utility industry

I investigate how deregulation leads firms to modify their internal governance structures to help control owner-manager agency conflict. Specifically, I explore how electric utilities respond to wholesale-level deregulation during the ten years surrounding the 1992 Energy Policy Act. I apply factor analysis to observable governance variables that exhibit change among utilities relative to industrial firms, and show that a single common factor captures firms' reliance on internal governance structure to control owner-manager agency problems. I find that deregulating utilities reduce their reliance on internal governance relative to industrial firms. I also show that the negative relation between deregulation and electric utilities' relative reliance on internal governance structure is largely explained by increases in competition and takeover activity among utilities relative to industrial firms. I conclude that competition and takeover activity substitute for firms' relative reliance on internal control of agency conflict.