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

Published online by Cambridge University Press:  06 April 2009

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

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
Copyright
Copyright © School of Business Administration, University of Washington 1996

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