Abstract
Agency theory and conventional wisdom suggest that strengthened monitoring and oversight mechanisms are necessary to align the actions of management with the interests of shareholders, which should be to maximize shareholder wealth. In 2003, legislators and regulators strengthened corporate governance with a series of laws and regulations in response to a number of corporate scandals in the late 1990s. The purpose of this study is to determine how strengthened monitoring and oversight mechanisms affected the performance of U.S. companies listed with NASDAQ. In conjunction with the agency view and conventional wisdom, we expect strengthened corporate governance to reduce agency problems and costs and increase firm performance. We conducted the study with a sample of 381 firms and 5,005 firm-year observations from U.S. companies trading on NASDAQ over the period 1997-2012. We analyzed the data using a difference-in-difference methodology and found that most firms were not affected by the 2003 changes to NASDAQ rules. The results are consistent with the window-dressing view that suggests managers retained their influence over the board and appointed directors who technically met the new requirements but were sympathetic to management, giving the impression that changes were made. Keywords: agency view ; corporate governance; firm performance; monitoring; oversight; NASDAQ; difference-in-difference methodology; window-dressing view DOI: 10.7176/RJFA/12-16-02 Publication date: August 31 st 2021
Highlights
Modern corporations are typically owned by many different shareholders who need knowledgeable and skilled individuals to act as agents and make business decisions on their behalf (Jensen & Meckling, 1976)
Information regarding the board of directors came from Institutional Shareholder Services (ISS; formerly RiskMetrics), which tracked the record of the S&P 1500 firms in the period 1996–2009 and was matched with financial information provided by CompuStat for 1997–2012
Our contribution to the literature is finding that the strengthened corporate-governance measures did not significantly impact firms listed with NASDAQ over an extended period of time, 10 years
Summary
Modern corporations are typically owned by many different shareholders who need knowledgeable and skilled individuals to act as agents and make business decisions on their behalf (Jensen & Meckling, 1976). As noted by Adam Smith in the late 1700s, the inherent problem with this expectation is that individuals tend to act in their own self-interests (Zogning, 2017) This creates a conflict between shareholders and their agents. The U.S Securities and Exchange Commission (SEC) adopted a series of changes to corporate-governance rules for publicly traded firms introduced by the National Association of Securities Dealers Automated Quotations System (NASDAQ). Under these rules, the monitoring and oversight responsibilities of the board of directors were strengthened
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have