Management Agency Costs Research Articles

Digital transformation and enterprise violation risk: A ‘motivation-opportunity-attitude’ framework

In the evolving digital economy, digital transformation has emerged as an important strategic choice for enterprises. Their comprehensive and innovative characteristics have instigated a paradigm shift in enterprise governance ideologies and models. However, this transformation has also introduced heightened demands and challenges to enterprise governance mechanisms during the transitional phase. This study examined the influence of digital transformation on enterprise violation risk using data from Chinese A-share listed companies from 2017 to 2021. The analysis revealed an inverted U-shaped relationship between the degree of digital transformation and enterprise violation risk. This relationship was underpinned by three fundamental dimensions: motivation, opportunity, and management attitude. These dimensions were elucidated through mechanisms involving risk perception, management agency costs, and management responsibilities. These conclusions were reached even after rigorous tests for endogeneity and stability. Furthermore, this study probed specific scenarios in which digital transformation influences enterprise violation risk. This finding revealed that internal control mechanisms and external analysts’ attention moderate this relationship. As the effectiveness of internal controls and the attention of external analysts increase, the inflection point of the inverted U-shaped curve shifts to the left, and the curve progressively smoothens. Thus, greater internal control effectiveness and the governance impact of external analysts can positively affect the correlation between digital transformation and enterprise violation risk, thereby facilitating digital resources to empower enterprise governance. This study contributes to the theoretical discourse on the implications of digital transformation for enterprise governance, particularly in the context of evolving market dynamics. It offers valuable insights and recommendations for effectively driving digital transformation processes.

Corporate digital transformation and tax avoidance: evidence from China

Digital transformation gives new impetus to corporate growth and influences corporate behavior. This study uses hand-collected digital transformation data on A-share listed non-financial enterprises in China from 2008 to 2019 to examine the relationship between corporate digital transformation and tax avoidance. Our findings suggest that the higher the corporate digital transformation, the lower the level of tax avoidance. This impact is more pronounced in firms with high equity incentives for management, a management team with a strong political background, and in firms located in provinces with a high willingness for government intervention and financial pressure from the government. The mechanism test shows that corporate digital transformation mainly decreases tax avoidance by reducing the agency costs of management and increasing media and analysts' attention to the firm. Thus, actively promoting digital transformation is one of the most important paths for guaranteeing a real and stable source of national tax revenue.

Can comment letters impact excess perks? Evidence from China

This paper investigates the impact of a global emerging governance tool, the comment letter, on firms' excess perks in China. We find that excess perks are significantly lower when the firms receive a perks-related comment letter. The results hold after a series of robust tests, including a difference-in-differences design. Moreover, cross-sectional tests show that the governance effect of perks-related comment letters on excess perks is attenuated in state-owned and politically connected firms, as these firms are more likely to capture regulators. Further testing shows that the regulatory effects of perks-related comment letters on excess perks are amplified by independent auditor scrutiny and media regulatory pressure; furthermore, their impact is more pronounced at companies with higher management agency costs. In addition, when the content of comment letters is of higher severity and the reply letters are more detailed, perks-related comment letters play a stronger governance role on excess perks. Finally, there is evidence that comment letters have a spillover effect on the excess perks of peer firms in the same industry and the same regions that do not receive such comment letters, revealing the indirect effect of regulatory scrutiny on excess perks. Our results prove that comment letters can effectively regulate firms' excess perks and that institutional factors greatly influence their regulatory effectiveness.

Analysts’ Green Coverage and Corporate Green Innovation in China: The Moderating Effect of Corporate Environmental Information Disclosure

Against the backdrop of China’s growing environmental concerns, investing in green technology innovation is a crucial solution to achieve the goal of “carbon peak and carbon neutrality”. Combining the perspectives of signaling theory and corporate governance theory, we use a sample of Chinese-listed companies from 2008 to 2020 to investigate the influence of analysts’ green coverage (AGC) on corporate green innovation (CGI) and the moderating effect of corporate environmental information disclosure (CEID) based on a textual analysis approach. The results show that AGC can significantly promote the quantity and quality of CGI, and CEID has a positive moderating effect on the process. Moreover, the mechanism analysis reveals that enhancing investors’ value recognition, improving corporate reputation capital, alleviating corporate financing constraints, reducing management agency costs, and curbing managerial myopia are the influence mechanisms of AGC on CGI. Additionally, the positive effect of AGC is more significant for firms located in regions with a favorable institutional environment, firms belonging to heavily polluting industries, and firms that have not adopted continuous innovation strategies.

Can differences in the background characteristics of the chairperson–CEO vertical dyad reduce management agency costs?—A perspective Based on the internal configuration of the top management team

We test whether differences in the background characteristics of firms’ chairperson and CEO can reduce management agency costs. We find that when the chairperson is older, has a higher level of education, and has more overseas experience than the CEO, the management agency costs will be lower. A series of robustness tests do not change our conclusions. In further analysis, we find that the negative relationship between the two is more significant for SOEs or firms experiencing fierce market competition. Finally, we also find that the chairman-CEO’s vertical dyad background characteristics differences can help to improve firm performance. Our study provides theoretical and practical implications for companies on how to best configure their top management team.

Family Power and Corporate Investment Efficiency

ABSTRACT This study examines the relationship between family power and corporate investment efficiency in Gulf Cooperative Council (GCC) countries. Family power in firms is manifested in how much decision-making power is concentrated in the hands of family members who are active either on the board of directors, or as executives of a firm. Using a unique measure of “family power,” we contribute to a growing interest in the role of family influence in the GCC emerging markets, where firms and business practices are typically controlled by families. We find that increased family power reduces firms’ level of under- and over-investment. We assert that this relation arises because firms are able to exhibit high levels of family power through socioemotional wealth preservation in reducing both management agency costs and earnings management.

Can employee stock ownership plans reduce corporate financialization? Evidence from China

Using a sample of China’s A-share listed companies from 2012 to 2019, this paper studies the impact of employee stock ownership plans (ESOPs) on corporate financialization. We find that the implementation of ESOPs has a significant inhibitory effect on corporate financialization, and a series of robustness checks indicate that the conclusion is valid. The mechanism tests show that ESOPs decrease corporate financialization by reducing management agency costs and improving internal control. Heterogeneity analyses indicate that ESOPs in firms with higher financing constraints, a lower external audit quality, and higher proportions of executive shareholdings and self-funded employee equity have a much stronger decreasing effect on corporate financialization.

Common Ownership and the Decline of the American Worker

The last forty years have seen two major economic trends: Wages have stalled despite rising productivity, and institutional investors have replaced retail shareholders as the predominant owners of the American equity markets. A few powerful institutional investors—dubbed common owners—now hold large stakes in most U.S. corporations. It is not a coincidence that at the same time American workers got a new set of bosses, their wages stopped growing, and shareholder returns went up. This Article reveals how common owners shift wealth from labor to capital, exacerbating income inequality. Powerful institutional investors’ policy of pushing public corporations to adopt strong corporate governance has an inherent, painful tradeoff. While strong governance can improve corporate efficiency—by reducing management agency costs—it can also reduce social welfare—by limiting investment and depressing the labor market. The shift to strong governance causes managers to limit investment and thus hiring, thereby depressing labor prices. Common owners act as a wage cartel, pushing labor prices below their competitive level. Importantly, common owners transfer wealth from workers to shareholders not by actively pursuing anticompetitive measures but rather by allocating more control to shareholders—control that can then be exercised by other shareholders, such as hostile raiders and activist hedge funds. If policymakers wish to restore the equilibrium that existed before common ownership dominated the market, they should break up institutional investors by limiting their size.

Policy Burden of State-Owned Enterprises and Efficiency of Credit Resource Allocation: Evidence from China

This article selects A-share state-owned listed companies in Shanghai and Shenzhen stock exchanges from 2007 to 2018 as samples and uses OLS together with intermediary effect tests to study the impact of state-owned enterprise’ (SOEs) policy burdens on credit resources and their allocation efficiency. The research finds that the heavier the policy burden SOEs assume, the more credit resources they obtained. However, they are also more likely to make inefficient investments after obtaining the credit resources, and these credit resources have a negative effect on the value of the SOEs which bear the policy burden. These negative impacts are more significant in SOEs with low degree of marketization in the region, low level of government control, and low information transparency. The path analysis elaborates that the policy burden of SOEs reduces the efficiency of resource allocation by increasing management agency costs and reducing financing constraints. The conclusions enrich the understanding of the consequences of policy burdens under the background of Chinese system, further broaden the analytical framework of the efficiency of credit resource allocation, and unveil the importance of relevant government departments that can optimize the efficiency of credit resource allocation.

Corporate Law and the Myth of Efficient Market Control

In recent times, there has been an unprecedented shift in power from managers to shareholders, a shift that realizes the long-held theoretical aspiration of market control of the corporation. This Article subjects the market control paradigm to comprehensive economic examination and finds it wanting. The market control paradigm relies on a narrow economic model that focuses on one problem only, management agency costs. With the rise of shareholder power, we need a wider lens that also takes in market prices, investor incentives, and information asymmetries. General equilibrium theory (GE) provides that lens. Several lessons follow from reference to this higher-order economic theory. First, the presumption that markets can efficiently coordinate the economy is shown to be unfounded, unless one relies on heroic assumptions. Second, GE shows that shareholders suffer from misaligned incentives, undercutting any normative program grounded in shareholder empowerment. The third lesson is negative, as there are no economically-founded instructions for addressing the trade-offs between agency costs reduction and market inefficiency implied by the new shareholder corporation. Policy implications also follow. Given the lack of a clear normative template, only private ordering can be counted on to address each corporation’s specific tradeoffs between agency costs and market inefficiency. This conclusion leads to an endorsement of Delaware’s equitable adjudication system, the flexibility of which is well-suited to policing the bargaining process between managers and empowered shareholders.

The Death of Corporate Law

For decades, corporate law played a pivotal role in regulating corporations across the United States. Consequently, Delaware, the leading state of incorporation, and its courts came to occupy a central and influential position in corporate law and governance. This, however, is no longer the case: The compositional shift in equity markets from retail to institutional ownership has relocated regulatory power over corporations from courts to markets. Corporate law has, as a result, and as illustrated by the declined role of the Delaware courts, lost its pride of place and is now eclipsed by shareholder activism. What explains the connection between the rise of institutional ownership and the death of corporate law? We answer this question by unpacking the relationship between market dynamics and the role of corporate law. Our analysis uncovers a critical, yet hitherto unnoticed, insight: The more competent shareholders become, the less important corporate law will be. Increases in shareholder competence reduce management agency costs, intensify market actors’ preference for private ordering outside of courts, and, ultimately, drive corporate law into the shadow.

Nonvoting Shares and Efficient Corporate Governance

A growing number of technology companies, including Google, Facebook, and Snapchat, have chosen to issue stock that does not allow their investors to vote on corporate decisions. But scholars and investors are in fundamental disagreement about whether nonvoting stock is a benefit or a curse. Critics argue that nonvoting shares perpetually insulate corporate insiders from influence and oversight and therefore increase management agency costs. By contrast, proponents contend that even in spite of increased agency costs, nonvoting shares may provide benefits that exceed these costs, such as enabling corporate insiders to pursue their long-term vision for the company without interference from outside shareholders. This paper offers a novel perspective on this debate. It demonstrates an important and previously unrecognized benefit of nonvoting stock: it can be used to make corporate governance more efficient. This is because nonvoting stock allows companies to divide voting power between shareholders who are informed about the company and its performance and those who are not. When this efficient sorting happens, the company will lower its cost of capital by reducing agency and transaction costs. Specifically, informed investors will pay more for voting stock that is not diluted by uninformed investor voting; indeed, a company may even entice informed investors to invest by offering two classes of shares. Likewise, uninformed investors will more highly value shares that do not require them to incur costs associated with voting. In other words, the company that issues nonvoting shares for its uninformed shareholders to buy will make itself more valuable. And because nonvoting stock trades at a discount to voting stock, uninformed shareholders will have another reason to purchase nonvoting shares, obviating the need for legal intervention. This insight has several implications for law. Most important, this paper contends that recent proposals to restrict or deter companies from issuing nonvoting shares should be rejected because they may impede efficient corporate structuring.

Agency Costs of Overvalued Equity and Earnings Management in Companies Listed on WSE

Agency Costs of Overvalued Equity and Earnings Management in Companies Listed on WSE

The role and effect of controlling shareholders in corporate governance

This paper examines two potentially contradictory effects of the presence of controlling shareholders. Controlling shareholders have been shown to be beneficial, as they generally have a long-term interest in the firm and are willing and able to monitor the actions of senior managers closely and decrease agency costs between shareholders and management (agency costs of Type I). However, they are also in a position to expropriate the firm’s assets, especially when they are actively involved in management (agency costs of Type II). More specifically, this article reviews how regulatory and legislative bodies have tried to curb the consumption of private benefits by controlling shareholders while preserving the beneficial aspects of their long-term interest and their monitoring role, the effect controlling shareholders on the application and effectiveness of corporate governance best practices as well as on the executive and board member remuneration.

Types of agency cost, corporate governance and liquidity

We study the relationship between governance and liquidity when the agency costs of entrenched management and self-serving controlling shareholders are present. Using a sample of Chinese firms, we show a positive relationship between governance and liquidity. We also find striking differences between firms faced with different types of agency conflicts. Specifically, governance measures such as management compensation, controlling shareholder monitoring and board independence are more effective in lowering the bid-ask spread for state-owned enterprises prone to management entrenchment. In contrast, multiple-layer corporate structures and a higher degree of separation between control and cash flow rights are associated with higher bid-ask spreads in non-state firms characterized by self-serving controlling shareholders. Our study highlights how governance might have different liquidity effects between firms faced with different types of agency conflicts.

The Essential Role of Securities Regulation

This Article posits that the essential role of securities regulations is to create a competitive market for information traders (analysts). The Article advances two related theses - one descriptive and the other normative. Descriptively, it demonstrates that securities regulation is specifically designed to facilitate and protect the work of analysts. Normatively, the Article shows that analysts are the only group that can best underwrite efficient and liquid capital markets and, hence, it is the group securities regulation should strive to protect. By protecting analysts, securities regulations enhance efficiency and liquidity in financial markets. This protection, in turn, benefits other types of investors by reducing transaction costs. Furthermore, by protecting analysts, securities regulation represents the highest form of market integrity by ensuring accurate pricing to all investors, and improves the allocation of resources in the economy. Securities regulation may be divided into three broad categories: disclosure duties; restrictions on fraud and manipulation; and restrictions on insider trading - each of which contributes to the creation of a vibrant market for analysts. Disclosure duties reduce analysts - costs of gathering information, and diminish the ability of analysts to produce biased analyses in exchange for pay. Restrictions on fraud and manipulation lower analysts' cost of verifying the credibility of information, and enhance analysts' ability to make accurate predictions. Finally, restrictions on insider trading protect analysts from competition from insiders that would undercut the ability of analysts to recoup their investment in information, and thereby drive analysts out of the market. Thus, the effect of securities regulation is to develop and secure a competitive market for analysts. Moreover, a competitive market for analysts reduces management agency costs. While courts can discern fraud or illegal transfers, they are ill-equipped to evaluate the quality of business decisions. Judicial oversight can curtail breaches of the duty of loyalty but not breaches of the duty of care; the tasks of curbing breaches of the duty of care and restraining inefficient investments are performed by analysts. Furthermore, a competitive analysts' market generates positive externalities for the rest of the economy by improving the information market and facilitating the operations of the investment banking industry. Our account has important implications for several policy debates. First, our account supports the system of mandatory disclosure. We show that while market forces may provide management with an adequate incentive to disclose at the initial public offering (IPO) stage, they cannot be relied on to effect optimal disclosure thereafter. Second, our analysis categorically rejects the calls to limit disclosure duties to hard information and self-dealing by management. Third, our analysis supports Basic v. Levinson and the use of the fraud-on-the-market presumption in all fraud cases regardless of how efficient financial markets are. Fourth, our analysis suggests that in cases involving corporate misstatements, the appropriate standard of care should, in principle, be negligence, not fraud.

Hire Joe to Run the Firm or Run the Firm Myself? Management Agency Costs in Entrepreneurial Firms

While Jensen and Meckling’s 1976 seminal work explores key aspects of the principal-agent relationship between owners and managers, they do not examine the principal’s decision on whether to hire the agent. An owner (principal) of a closely held firm can either hire someone to manage her firm (agent) or run the firm herself. Her goal is to maximize her own welfare, not the value of the firm; this is important because owner welfare maximization and firm value maximization can be inconsistent in this decision. We use this distinction to define and empirically measure entrepreneurial firms’ management agency costs.

Hire Joe to Run the Firm or Run the Firm Myself? Management Agency Costs in Entrepreneurial Firms

Hire Joe to Run the Firm or Run the Firm Myself? Management Agency Costs in Entrepreneurial Firms

Hire Joe to Run the Firm or Run the Firm Myself? Management Agency Costs in Entrepreneurial Firms

Hire Joe to Run the Firm or Run the Firm Myself? Management Agency Costs in Entrepreneurial Firms

The Case Against Shareholder Empowerment

Many look toward enactment of the law reform agenda held out by proponents of shareholder empowerment as a part of the regulatory response to the financial crisis. This Article argues that the financial crisis exposes major weaknesses in the shareholder case. Our claim is that shareholder empowerment delivers management a simple and emphatic marching order: manage to maximize the market price of the stock. And that is exactly what the managers of a critical set of financial firms did in recent years. They managed to a market that focused on increasing observable earnings and, as it turned out, failed to factor in concomitant increases in risk that went largely unobserved. The fact that management bears primary responsibility for the disastrous results does not suffice to effect a policy connection between increased shareholder power and sound regulatory reform. A policy connection instead turns on a counterfactual question: Whether increased shareholder power would have imported more effective risk management in advance of the crisis. We conclude that no plausible grounds exist for making such a case. In the years preceding the financial crisis, shareholders validated the strategies of the very financial firms that pursued high leverage, high return, and high risk strategies and penalized those that did not. It is hard to see how shareholders, having played a role in fomenting the crisis, have a positive role to play in its resolution.The prevailing legal model of the corporation strikes a better balance between the powers of directors and shareholders than does the shareholder-centered alternative. Shareholder proponents see management agency costs as a constant in history and shareholder empowerment as the only tool available to reduce them. This Article counters this picture, making reference to agency theory and recent history to describe a dynamic process of agency cost reduction. It goes on to show that shareholder empowerment would occasion significant agency costs on its own by forcing management to a market price set in most cases under asymmetric information and set in some cases in speculative markets in which heterogeneous expectations obscure the price’s informational content.