Abstract not found

We provide an argument and present evidence that industry factors play an important role in corporate governance. In particular, an industry’s investment opportunities, product uniqueness, competitive environment, information environment, and leverage help explain its corporate governance structures. These factors can have quite different associations (in strength and direction) with the monitoring capabilities of the board of directors versus the shareholder orientation of corporate charter provisions. This suggests systematic differences in the relative costs and benefits of alternative monitoring mechanisms. A focus on firm influences within industries suggests that firm and industry factors contribute equally to the observed variation in governance structures. We also find evidence that firms ’ broad governance structures revert over time toward industry norms. The separation of ownership and control in corporations can result in costly agency conflicts between owners and managers. Impediments to monitoring and the existence of transactions costs imply that contracts alone cannot resolve such conflicts, giving rise to the need for governance structures (Hart (1995)). These corporate

this paper are those of the authors and do not necessarily reflect those of TIAA-CREF. We would

2005. [32] pages. Under contract SBAHQ-04-M-0136 Agency problems * arise when a corporate organization (the principal) employs a professional manager (the agent) and thereby separates the business owner(s) from control of the business. Most previous studies of such agency problems used data from publicly traded companies. Applying these study results to small owner-controlled business reveals two limitations. First, in most publicly traded companies, the largest shareholders seldom own more than 50 percent; therefore, the results may not be applicable to problems faced by smaller, family/owner-managed firms. Second, since control is not separate from ownership, these small firms should, by definition, have no agency problem. Family shareholders usually are less likely to expropriate bondholder wealth than other shareholders; family firms may also have incentive structures that result in fewer agency conflicts between equity and debt claimants. The author hypothesizes that agency problems suffered by larger firms are not statistically significant for smaller owner-manager or family-owned

Two different financial systems with some opposing features have evolved in the advanced economies, namely the insider system and the outsider system. In this paper, we provide a theoretical framework where the features of the optimal governance system are derived as a function of economywide parameters, such as the degree of development of markets and the quality of the institutions, and firmspecific parameters, such as the productivity of its technology. Our results include the following: 1) For a degree of relative development of markets below a threshold, internal governance systems dominate for all firms in the economy independent of productivity, 2) When the development of markets in an economy is above that threshold, either system may emerge as optimal depending on the productivity of the technology. There are marked differences in the residual agency costs under the two systems when the scale of investment is large. It is shown that insider systems constitute the optimal governance system for technologies that are optimally implemented at a small scale while outsider systems dominate for technologies that are optimally implemented at large scales. These results provide a new argument for the potential convergence towards outsider systems based on technological growth. The differences among the corporate governance systems of the advanced economies of the world have

he topic of corporate governance in general, and topmanagement compensation in particular, has received enormous attention in recent years. 1 Although an increasing literature has examined various aspects of the corporate

financial support.