Extending the legal approach to corporate governance: Legislative threats and negotiation dynamics in regulatory development

Research within the legal approach to corporate governance has examined both the effects of regulation and the responses of market participants to legislative developments prior to the enactment of formal regulation. However, less attention has been devoted to the interactions through which governance arrangements are negotiated and shaped during regulatory development. This study addresses this gap by examining how legislative pressure and strategic responses influence the development of governance arrangements before formal legislation is enacted. Empirically, the study is based on a deductive qualitative content analysis of 39 regulatory and industry documents concerning the development of the first European Union regulation of credit rating agencies between 2002 and 2009. Two complementary theoretical perspectives are employed. Legislative Threat Theory (LTT) is used to identify how regulators create pressure through explicit, implicit, and anticipatory legislative threats, while the Dual Concern Model (DCM) is used to analyze how regulators and regulatees respond through different negotiation strategies. The findings indicate that legislative threats and negotiation strategies evolve throughout the regulatory process and play an important role in shaping governance arrangements before formal legislation is enacted. The analysis suggests that regulatory development involves an ongoing interplay between pressure, negotiation, and strategic adaptation by both regulators and regulated entities. By combining insights from LTT and DCM, the study contributes a process-oriented perspective to the legal approach to corporate governance and offers new insights into how governance arrangements are negotiated and developed during regulatory development.