Hostname: page-component-586b7cd67f-2brh9 Total loading time: 0 Render date: 2024-11-23T19:17:55.581Z Has data issue: false hasContentIssue false
  • English
  • Français

Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders

Published online by Cambridge University Press:  06 April 2009

Anup Agrawal  and
Charles R. Knoeber
Anup Agrawal
Affiliation:
College of Management, North Carolina State University, Raleigh, NC 27695
Charles R. Knoeber
Affiliation:
College of Management, North Carolina State University, Raleigh, NC 27695
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper examines the use of seven mechanisms to control agency problems between managers and shareholders. These mechanisms are: shareholdings of insiders, institutions, and large blockholders; use of outside directors; debt policy; the managerial labor market; and the market for corporate control. We present direct empirical evidence of interdependence among these mechanisms in a large sample of firms. This finding suggests that crosssectional OLS regressions of firm performance on single mechanisms may be misleading. Indeed, we find relationships between firm performance and four of the mechanisms when each is included in a separate OLS regression. These are insider shareholdings, outside directors, debt, and corporate control activity. Importantly, the effect of insider shareholdings disappears when all of the mechanisms are included in a single OLS regression, and the effects of debt and corporate control activity also disappear when estimations are made in a simultaneous systems framework. Together, these findings are consistent with optimal use of each control mechanism except outside directors.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 31 , Issue 3 , September 1996 , pp. 377 - 397
Copyright
Copyright © School of Business Administration, University of Washington 1996

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Asquith, P. “Merger Bids, Uncertainty, and Stockholder Returns.” Journal of Financial Economics, 11 (04 1983), 51–84.CrossRefGoogle Scholar
Basmann, R. L. “On Finite Sample Distributions of Generalized Classical Linear Identification Test Statistics.” Journal of the American Statistical Association, 55 (12 1960), 650–659.CrossRefGoogle Scholar
Bhagat, S.; Brickley, J. A.; and Lease, R. C.. “Incentive Effects of Stock Purchase Plans.” Journal of Financial Economics, 14 (03 1985), 195–216.CrossRefGoogle Scholar
Bradley, M.; Jarrell, G.; and Kim, E. H.. “On the Existence of an Optimal Capital Structure: Theory and Evidence.” Journal of Finance, 39 (07 1984), 857–878.CrossRefGoogle Scholar
Brickley, J. A.; Bhagat, S.; and Lease, R. C.. “The Impact of Long-Range Managerial Compensation Plans on Shareholder Wealth.” Journal of Accounting and Economics, 7 (04 1985), 115–129.CrossRefGoogle Scholar
Crystal, G.In Search of Excess. New York, NY: Norton (1991).Google Scholar
DeAngelo, H., and Rice, E. M.. “Antitakeover Charter Amendments and Stockholder Wealth.” Journal of Financial Economics, 11 (04 1983), 329–360.CrossRefGoogle Scholar
Dechow, P. M.; and Sloan, R. G.. “Executive Incentives and the Horizon Problem.” Journal of Accounting and Economics, 14 (03 1991), 51–89.CrossRefGoogle Scholar
DeFusco, R. A.; Johnson, R. R.; and Zorn, T. S.. “The Effect of Executive Stock Option Plans on Stockholders and Bondholders.” Journal of Finance, 45 (06 1990), 617–628.CrossRefGoogle Scholar
Demsetz, H., and Lehn, K.. “The Structure of Corporate Ownership: Causes and Consequences.” Journal of Political Economy, 93 (12 1985), 1155–1177.CrossRefGoogle Scholar
Healy, P. M.; Palepu, K. G.; and Ruback, R. S.. “Does Corporate Performance Improve after Mergers?” Journal of Financial Economics, 31 (04 1992), 135–176.CrossRefGoogle Scholar
Hermalin, B. E., and Weisbach, M. S.. “The Determinants of Board Composition.” Rand Journal of Economics, 19 (Winter 1988), 589–606.CrossRefGoogle Scholar
Hermalin, B. E., and Weisbach, M. S.. “The Effects of Board Composition and Direct Incentives on Firm Performance.” Financial Management, 20 (Winter 1991), 101–112.CrossRefGoogle Scholar
Holthausen, R. W., and Larcker, D. F., “Organizational Structure and Financial Performance.” The Wharton School, Univ. of Pennsylvania (12 1993).Google Scholar
Jarrell, G. A., and Poulsen, A. B.. “Shark Repellents and Stock Prices: The Effects of Antitakeover Amendments since 1980.” Journal of Financial Economics, 19 (09 1987), 127–168.CrossRefGoogle Scholar
Jarrell, G. A., and Poulsen, A. B.. “Dual-Class Recapitalizations as Antitakeover Mechanisms: The Recent Evidence.” Journal of Financial Economics, 20 (01/03 1988), 129–152.Google Scholar
Jensen, G. R.; Solberg, D. P.; and Zorn, T. S.. “Simultaneous Determination of Insider Ownership, Debt, and Dividend Policies.” Journal of Financial and Quantitative Analysis, 27 (06 1992), 247–263.CrossRefGoogle Scholar
Karpoff, J. M., and Malatesta, P. H.. “The Wealth Effects of Second-Generation State Takeover Legislation.” Journal of Financial Economics, 25 (12 1989), 291–322.CrossRefGoogle Scholar
Knoeber, C. R. “Golden Parachutes, Shark Repellents and Hostile Tender Offers.” American Economic Review, 77 (03 1986), 155–167.Google Scholar
Lambert, R. A., and Larcker, D. F.. “Golden Parachutes, Executive Decision-Making and Shareholder Wealth.” Journal of Accounting and Economics, 7 (04 1985), 179–203.CrossRefGoogle Scholar
Lindenberg, E. B., and Ross, S. A.. “Tobin's q ratio and Industrial Organization.” Journal of Business, 54 (01 1981), 1–32.CrossRefGoogle Scholar
Linn, S. C., and McConnell, J. J.. “An Empirical Investigation of The Impact of ‘Antitakeover’ Amendments on Common Stock Prices.” Journal of Financial Economics, 11 (04 1983), 361–399.CrossRefGoogle Scholar
Malatesta, P. H., and Walkling, R. A.. “Poison Pill Securities: Stockholder Wealth, Profitability, and Ownership Structure.” Journal of Financial Economics, 20 (01/03 1988), 347–376.CrossRefGoogle Scholar
McConnell, J., and Servaes, H.. “Additional Evidence on Equity Ownership and Corporate Value.” Journal of Financial Economics, 27 (10 1990), 595–613.CrossRefGoogle Scholar
Morck, R.; Shleifer, A.; and Vishny, R.. “Management Ownership and Market Valuation: An Empirical Analysis.” Journal of Financial Economics, 20 (01/03 1988a), 293–316.CrossRefGoogle Scholar
Morck, R.; Shleifer, A.; and Vishny, R.. “Characteristics of Targets of Hostile and Friendly Takeovers.” Corporate Takeovers: Causes and Consequences, Auerbach, A. J., ed. Chicago, IL: Univ. of Chicago Press (1988b), 101–129.Google Scholar
Moyer, R. C.; Rao, R.; and Sisneros, P. M.. “Substitutes for Voting Rights: Evidence from Dual Class Recapitalizations.” Financial Management, 21 (Autumn 1992), 35–47.CrossRefGoogle Scholar
Palepu, K. G. “Predicting Takeover Targets: A Methodological and Empirical Analysis.” Journal of Accounting and Economics, 7 (03 1986), 3–35.CrossRefGoogle Scholar
Partch, M. M. “The Creation of a Class of Limited Voting Common Stock and Shareholder Wealth.” Journal of Financial Economics, 18 (06 1987), 313–340.CrossRefGoogle Scholar
Perfect, S. B., and Wiles, K. W.. “Alternative Constructions of Tobin's q: An Empirical Comparison.” Journal of Empirical Finance, 1 (07 1994), 313–341.CrossRefGoogle Scholar
Rosenstein, S., and Wyatt, J. G.. “Outside Directors, Board Independence, and Shareholder Wealth.” Journal of Financial Economics, 26 (08 1990), 175–191.CrossRefGoogle Scholar
Ryngaert, M. “The Effect of Poison Pill Securities on Shareholder Wealth.” Journal of Financial Economics, 20 (01/03 1988), 377–418.CrossRefGoogle Scholar
Song, M. H., and Walkling, R. A.. “The Impact of Managerial Ownership on Acquisition Attempts and Target Shareholder Wealth.” Journal of Financial and Quantitative Analysis, 28 (12 1993), 439–458.CrossRefGoogle Scholar
Titman, S., and Wessels, R.. “The Determinants of Capital Structure Choice.” Journal of Finance, 43 (03 1988), 1–19.CrossRefGoogle Scholar
Zeckhauser, R. J., and Pound, J.. “Are Large Shareholders Effective Monitors? An Investigation of Share Ownership and Corporate Performance.” Asymmetric Information, Corporate Finance, and Investment, Hubbard, R. G., ed. Chicago, IL: Univ. of Chicago Press (1990), 149–180.Google Scholar