Deregulation and the adaptation of governance structure: the case of the US airline industry

Deregulation provides a natural experiment for examining how governance ada pts to structural changes in the business environment. We investigate the e volution of governance structure, characterized by ownership concentration, compensation policy, and board composition, in the U.S. airline industry d uring a 22-year period surrounding the Airline Deregulation Act of 1978. Co nsistent with theory, we find that after deregulation (i) equity ownership is more concentrated, (ii) CEO pay increases, (iii) stock option grants to CEOs increase, and (iv) board size decreases. Airlines' governance structur es gravitate toward the system of governance mechanisms used by unregulated firms. The adaptation process is gradual, however, suggesting that it is c ostly to alter organizational capital. We also present evidence on the rela tion between governance structure and firm survival. (C) 1999 Elsevier Scie nce S.A. All rights reserved. JEL classification: G32; G38; J33; L93.