Agency Explanation Research Articles

Internal Governance and Cost Stickiness

ABSTRACTInternal governance is the bottom-up governance mechanism within the top management team (hereinafter referred to as “TMT”) through which key subordinates internally monitor the Chief Executive Officer (CEO). We find that cost stickiness is negatively associated with internal governance after controlling for legitimate economic reasons of cost stickiness, suggesting that internal governance mitigates agency-based cost stickiness. Consistent with the agency explanation, the results show that the impact of internal governance on cost stickiness is stronger for firms with lower future-value creation of selling, general, and administrative (SG&A) costs. In addition, we document that the impact of internal governance on cost stickiness is more pronounced for firms with more-effective board monitoring. This paper extends a growing literature that investigates the impact of internal governance on corporate decisions and complements existing studies on the role of various governance mechanisms in mitigating agency-based cost stickiness.JEL Classifications: M41; G30.

The disciplinary role of product market competition on cash holding

This paper provides evidence supporting the disciplinary role of product market competition on cash holding. We use the regulation-induced IPO suspensions in China as shocks to product market competition. With a generalized difference-in-difference design, we find that reduced competition threat induced by rivals' IPO suspension increases incumbent companies' cash level by 1.0 percentage points. The effect of IPO suspension on cash holding is weakened when the product market is highly competitive before suspensions and more pronounced for companies with severe agency problems and loose governance mechanisms. Furthermore, we document that the marginal value of cash reduces during IPO suspension, and companies' cash level decreases when IPO restarts. Our paper contributes to the literature by providing the plausibly causal effect of product market competition on cash holding and an agency explanation from the perspective of competition's disciplinary role in mitigating managers' slack.

Responsible Hedge Funds

Abstract Hedge funds that endorse the United Nations Principles for Responsible Investment (PRI) underperform other hedge funds after adjusting for risk but attract greater investor flows, accumulate more assets, and harvest greater fee revenues. Consistent with an agency explanation, the underperformance is driven by PRI signatories with low environmental, social, and governance (ESG) exposures and is greater for hedge funds with poor incentive alignment. To address endogeneity, we exploit regulatory reforms that enhance stewardship and show that the ESG exposure and relative performance of signatory funds improve post reforms. Our findings suggest that some hedge funds endorse responsible investment to pander to investor preferences.

ESG rating and stock price crash risk: Evidence from China

While several studies evidence that firm social responsibility lowers stock crash risk, few investigate this for China. Further, few studies investigate the aggregate role of environmental, social, and corporate governance responsibilities, rather than just social responsibility alone. Additionally, unlike previous studies, we consider both stakeholder and agency explanations. We investigate the relationships between environmental, social, and corporate governance (ESG) ratings and stock price crash risk, finding a statistically and economically significant negative relationship for Chinese firms. Results are consistent with agency-theory based explanations. Results will be of interest to scholars interested in the general impact of promotion of public goods on firm performance, as well as to researchers and investors interested in the Chinese institutional environment.

Socially Responsible Hedge Funds

We find that a non-trivial number of hedge funds that endorse the United Nations Principles for Responsible Investment indulge in greenwashing. Hedge funds that greenwash underperform both genuinely green and nongreen funds after adjusting for risk. Consistent with an agency explanation, greenwashers (i) underperform more when incentive alignment is poor, (ii) trigger more regulatory violations, and (iii) report more suspicious returns. By exploiting regulatory reforms that aim to enhance stewardship and curb greenwashing, we provide causal evidence that relates agency problems to greenwashing and fund underperformance. Investors, however, do not appear to discriminate between greenwashers and genuinely green funds.

Is the Corporate Control Market Segmented?

Gorbenko and Malenko (2014) propose a segmented-market perspective. We extend the literature by directly testing if a segmented-market perspective helps explain the premium difference between private and public acquisitions. Empirically, we follow Fidrmuc et al. (2012) and use a matched sample design. We find that private acquirers do not pay less than public acquirers when controlling for the selling mechanism (which characterizes different corporate control markets) as well as the effects of outliers. Our results suggest that premium differences between private and public acquisitions may be more consistent with a segmented-market perspective as opposed to the agency explanation of Bargeron et al. (2008). TOPICS:Private equity, performance measurement

The Pitfalls of Going Public: New Evidence from Hedge Funds

Hedge funds managed by listed firms significantly underperform funds managed by unlisted firms. We argue that since the new shareholders of a listed management company typically do not invest alongside the limited partners of the funds managed, the process of going public breaks the incentive alignment between ownership, control, and investment capital, thereby engendering agency problems. In line with the agency explanation, the underperformance is more severe for funds that have low manager total deltas, low governance scores, and no manager personal capital, or that are managed by firms whose stock prices are more sensitive to earnings news. Post IPO, listed firms aggressively raise capital by launching multiple new funds. Consequently, despite the underperformance, listed firms harvest greater fee revenues than do comparable unlisted firms. Investors continue to subscribe to hedge funds managed by listed firms as they appear to offer lower operational risk.

How do chief financial officers influence corporate cash policies?

This paper examines the extent to which Chief Financial Officers (CFOs) affect corporate cash holding policies. We construct an index (CFO index) that enables us to distinguish between “strong” and “weak” CFOs based on their ability to influence firm outcomes. We find that firms with strong CFOs hold substantially less cash than firms with weak CFOs, ceteris paribus. Importantly, the CFO effect documented in our study goes beyond the effect caused by the Chief Executive Officer (CEO) on cash holdings. Our findings provide the first direct empirical evidence that firms with strong CFOs are well positioned to hold less cash due to their relatively weak precautionary motive and superior ability to raise external financing during periods of financial stress. Consistent with an agency explanation, our results also show that strong CFOs fulfill a monitoring role in firms with higher agency costs.

Of sacraments, sacramentals and anthropology: is anthropological explanation sacramental?

ABSTRACTThis paper suggests that what is usually called a cultural misunderstanding of biomedical disease categories may be construed as a biomedical and anthropological misunderstanding of cultural categories. This is premised on the fact that anthropology often functions as an intimate double and handmaiden of biomedicine, in so far as it refuses to countenance the possibility of theurgic aetiologies in the realm of what is called ‘mental illness’. Such a refusal displaces native explanations of divine or demonic agency to human agency. This is best elucidated by examining the unexamined religious beliefs of Anglo-European anthropology, which appears to be the terra firma of its emic explanatory categories. The paper attempts to demonstrate this by proposing that while native explanations are akin to the sacraments, anthropological explanations are akin to sacramentals (holy water, the cross, the scapular, verbal blessings). While the sacraments, like divine agency, operate ex opere operato, the sacramentals are dependent on the disposition of the recipient and on the good offices of the church, as they operate ex opere operantis ecclesiae (from the work of the working church), as well as ex opere operantis (from the work of the working one). If the sacraments are efficacious as it is work done by Christ alone, and akin to work done by the possessing agent, sacramentals are efficacious as they are also dependent on human agency. In other words, anthropological explanations are, at best, ‘sacramental’ as they replace emic theurgic explanations by etic ones, where human agency in the form of the priest, the institution of the church, and the lay person who is the recipient of divine dispensation, also have a role to play; or, as is often the case, the only role to play.

Litigation Risk and Cost Behavior: Evidence from Derivative Lawsuits

This study explores whether managers’ personal litigation risk impacts managerial empire building through the lens of their firms’ cost behavior. Exploiting the staggered adoption of universal demand (UD) laws at the state-level in the U.S., we find a significant decrease in Selling, General & Administrative (SGA (2) with weaker corporate governance; (3) operating in less competitive product markets; (4) with higher information asymmetry; and (5) with lower ex ante litigation risk. Our findings highlight the importance of shareholders’ litigation rights in curbing managerial empire building and add to the agency explanation for cost behavior.

Jessica Riskin. The Restless Clock: A History of the Centuries-Long Argument over What Makes Living Things Tick. xiii + 548 pp., illus., bibl., index. Chicago/London: University of Chicago Press, 2016. $40 (cloth).

Jessica Riskin. <i>The Restless Clock: A History of the Centuries-Long Argument over What Makes Living Things Tick</i>. xiii + 548 pp., illus., bibl., index. Chicago/London: University of Chicago Press, 2016. $40 (cloth).

The JOBS Act and Information Uncertainty in IPO Firms

ABSTRACTThis study examines the effect of the Jumpstart Our Business Startups Act (JOBS Act) on information uncertainty in IPO firms. The JOBS Act creates a new category of issuer, the Emerging Growth Company (EGC), and exempts EGCs from several disclosures required for non-EGCs. Our findings are consistent with proprietary cost concerns motivating EGCs to eliminate some of the previously mandatory disclosures, which increases information uncertainty in the IPO market, attracts investors who rely more on private information, and leads EGCs to provide additional post-IPO disclosures to mitigate the increased information uncertainty. Our results also are consistent with agency explanations, whereby EGCs exploit the JOBS Act provisions to avoid compensation-related disclosures, which results in larger IPO underpricing for such firms. Overall, we provide evidence on how reduced mandatory disclosure affects the IPO market.

Lying to ourselves: rationality, critical reflexivity, and the moral order as 'structured agency'.

A report suggests that United States' army officers may engage in dishonest reporting regarding their compliance procedures. Similarly, nurses with espoused high ethical standards sometimes fail to live up to them and may do so while deceiving themselves about such practices. Reasons for lapses are complex. However, multitudinous managerial demands arising within 'technical and instrumental rationality' may impact on honest decision-making. This paper suggests that compliance processes, which operates within the social structural context of the technical and instrumental rationality manifest as 'managerialism', contributes to professional 'dishonesty' about lapses in care, sometimes through 'thoughtlessness'. The need to manage risk, measure, account, and control in order to deliver efficiency, effectiveness, and economy (technical rationality) thus has both unintended and dysfunctional consequences. Meeting compliance requirements may be mediated by factors such as the 'affect heuristic' and 'reflexive deliberations' as part of the 'structured agency' of nurses. It is the complexity of 'structured agency' which may explain why some nurses fail to respond to such things as sentinel events, a failure to recognize 'personal troubles' as 'public issues', a failure which to outsiders who expect rational and professional responses may seem inconceivable. There is a need to understand these processes so that nurses can critique the context in which they work and to move beyond either/or explanations of structure or agency for care failures, and professional dishonesty.

Beyond rational choice: How teacher engagement with technology is mediated by culture and emotions

This paper focuses on the relationship between rational beliefs, culture and agency in formal school settings. This relationship is analysed in the context of the adoption of technological innovations. Interviews and focus groups with 39 secondary teachers from England and other European countries were carried out. The analysis highlights a number of cultural differences between English teachers and their continental colleagues. The paper argues against a linear and simplistic appropriation of rational choice theory in educational research, whereby individual behaviour is examined from the perspective of individualist psychology and micro-economic theory without considering models of culturally informed agency beyond self-interest and calculation. In the conclusion, the paper argues that explanations of teacher agency in relation to technology must take into account the role of rationality and emotionality - not as a binary opposition that reflects actual psychological qualities that teachers may or may not possess, but as phenomena to be unpacked: competing (and culturally shaped) discursive strategies enacted to make sense of the world.

Dissipative Competition: Evidence from a Quasi‐Natural Experiment

AbstractWe document that contrary to the conventional view, the costs of domestic firms in terms of selling, general and administrative expenses and cost of goods sold increase significantly following exogenous shocks that increase competition, namely material import tariff cuts affecting US manufacturing industries over the period 1974–2005. Incompatible with an agency explanation, the cost increase is more pronounced among firms with higher CEO/insider/board ownership. We further find that the cost increase is more evident among firms with smaller market share and among focused firms. Generally, our results are consistent with the notion of ‘dissipative competition’ discussed in the seminal papers by Tullock.

Dividend policy in India: new survey evidence

Purpose – The purpose of this paper is to survey managers of dividend-paying firms listed on the National Stock Exchange (NSE) in India to learn their views about the factors influencing dividend policy, dividend issues, and explanations for paying cash dividends and repurchasing shares. The authors compare the results to other dividend surveys based on firms in Indonesia, Canada, and the USA. Design/methodology/approach – The authors use questionnaire to gather primary data from a sample of 500 firms listed on the NSE. Findings – The most important determinants of dividends involve earnings (the stability of earnings as well as the level of current and expected future earnings) and the pattern of past dividends. Comparing the overall rankings of the 21 factors by respondents from Indian firms to those of Indonesian, Canadian, and US firms reveals statistically significant correlations. Respondents also perceive that dividend policy affects firm value. Respondents also view maintaining an uninterrupted record of dividends as important. The most highly supported explanations for paying cash dividends concern signaling, the firm life cycle, and catering. Although none of the theories of repurchasing shares is dominant, respondents provide little support for the agency explanation. Research limitations/implications – Although the tests suggest that the sample does not suffer from non-response bias, the findings should be viewed as suggestive rather than definitive because of the relatively low response rate. Originality/value – The paper presents new evidence about dividend policy of Indian firms. To the knowledge, this is the most comprehensive survey of Indian firms to date that captures managerial perceptions on both cash dividends and share repurchases.

A Behavioral Agency Explanation of Managerial Effort Level and Effort Alignment: Money versus Jobs

Classical agency theory and its associated practice focus almost exclusively on extrinsic motivation and the design of monetary incentives for explaining managerial effort levels and effort alignment. In this article, we challenge the realism and usefulness of this assumption for the purpose of corporate governance. Using data from a large-scale survey of Norwegian managers, we show that monetary incentives only explain a small amount of variance in extrinsic motivation, effort levels and effort alignment. The motivational potential of the managers’ jobs on the other hand explain a substantial amount of variance in intrinsic motivation and effort levels. We find no evidence that the presence of extrinsic incentives crowds intrinsic motivation. However, we find a hitherto undiscovered crowding effect, i.e. that intrinsic motivation appear to crowd out extrinsic motivation.

Bound by Laws, or by Values? A Multi‐Level and Cross‐National Approach to Understanding the Protection of Minority Owners in Family Firms

AbstractManuscript TypeConceptualResearch Question/IssueHow do firm‐level attributes and country‐level institutions affect cross‐national and firm‐level differences in how minority owner rights in family firms are protected?Research InsightsWe consider differences in family dynamics, stewardship‐oriented organizational culture, and countries' legal and cultural dimensions to develop theory predicting differences in minority owner protection in family firms. We advance propositions and a model delineating the role of these key firm‐level and country‐level constructs.Theoretical/Academic ImplicationsWe contribute to the literature in three ways: (1) We illustrate the importance of family dynamics for predicting the likelihood of a stewardship‐oriented culture to emerge in a family firm; (2) our multi‐level and cross‐national approach extends earlier explanations of agency and stewardship that are centered at the firm, family, and individual levels of analysis; and (3) we consider the impact of cross‐cultural dimensions on family firms, an area that has received limited attention in the literature.Practitioner/Policy ImplicationsOur research implies that individuals considering becoming a minority owner in a family firm should take into account not only the legal institutions of that country (which might not be as strong as they first seem) but also intra‐firm family dynamics and the prevalent norms and values of the firm's national culture to get a more complete picture of the protections available to them.

Why Do Innovative Firms Hold So Much Cash? Evidence from Changes in State R&amp;D Tax Credits

This paper uses the staggered changes of R&D tax credits across U.S. states and over time as a quasi-natural experiment to examine the impact of innovation on corporate liquidity. By generating plausibly independent variation in firms' incentive to invest in R&D, we are able to assess the empirical importance of specific theories of the link between innovation and corporate liquidity. Firms increase (decrease) their cash to asset ratios by about one and a half percentage point when their home state increases (cuts) R&D tax credits. These baseline difference-in-differences estimates hold up to a battery of validation, falsification, and robustness checks, which corroborate their internal and external validity. The treatment effect of R&D tax credits increases monotonically with several specific proxies for debt and equity financing frictions. Increases (cuts) in tax credits also lead to increases (decreases) in the ratios of cash to bank lines of credit and to book equity, and to decreases (increases) in bank debt, secured debt, and overall net indebtness, supporting debt and equity financing channels through which innovation impacts the demand for cash. We also find support for a product market competition channel, and assess repatriation and agency explanations. Overall, our analysis offers endogeneity-free evidence that innovation is a first-order driver of corporate liquidity management decisions.

The Likely Effect of CEO Hiring Source on Total Cash Flow

We examine the financial performance that firms realize by the decision to hire a new CEO from within the firm versus externally. Using a structural self-selection modeling approach, we find, for boards that hire externally, less total cash flow on average than would have been obtained from the passed over internal candidate (a marginal loss). A marginal gain is found for boards that promote internally. The marginal loss we find when hiring externally is not likely explained by theories based on maximizing firm value. Our results are consistent with behavioral theories involving overconfidence or with agency explanations.