In this study, we investigate whether incentive regulation (IR) is associated with improvements infirm performance. We also examine the effect of IR type on the information contents of earnings and cash flows. The empirical analysis uses price-to-book ratio, earnings, and cash flows as the empirical proxies of firm performance. The analysis also controls for the potential effects of firm size and regulatory climate on the results. We find that firms operating under IR exhibit improvements in each of the performance metrics. It is shown that the information contents of earnings and cashflows for the price-to-book ratio are higher for IR than for non-IR firms, after controlling for the effects affirm size and regulatory climate. The results also reveal that variation in IR type is associated with differences in the information contents of earnings and cash flows. We also find that, prior to the introduction of IR, the performances of IR and non-IR firms are not fundamentally different.
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