Corporate governance, the role of markets and regulation: introduction

The fundamental problem of corporate governance in the modern corporation arises from the separation of equity ownership from corporate control that is the foundation of modern capitalism. It has a long history, notably, Berle and Means (1932). The problem does not exist with small business where the owners and managers are identical or in traditional theory of the firm in micro economics. Broadly speaking, governance encompasses the laws, rules, practices, institutions, etc that govern the relationship between stockholders and managers. Markets (financial, markets, product markets and the market for corporate control) and regulation are important pieces of corporate governance. This Special Issue is concerned primarily with the interaction of markets and regulation. Markets, regulation and the law in general play a significant role in corporate governance. The separation of equity ownership and corporate control is the basis for a principal-agent or agency problem. Prima facie managers and stockholders have different objectives. The feasibility of designing incentive compensation schemes to align the interests of managers and stockholders has been accepted in finance for many