Academic journal article International Journal of Management

Determinants of Governance Structure among Companies: A Test of Agency Theory Predictions

Academic journal article International Journal of Management

Determinants of Governance Structure among Companies: A Test of Agency Theory Predictions

Article excerpt

This study tests the model of Davis, Schoorman, and Donaldson (1997) that proposed determinants of a company's governance structure. In particular, we focus on the agency theory aspects of the model and its ability to predict the presence of an opportunist-orientation CEO at publicly listed U.S. companies. Using survey based data obtained from CEOs and directors of 100 companies in a match-pair design, we identified three variables that predicted the occurrence of agency-oriented behaviors by the company's CEO. These results lend support for the model's ability to predict the conditions under which opportunists become CEOs.

Agency theory is an oft-used tool researchers apply in exploring the effects and conditions of governance relations between corporate CEOs and directors. However, the successful application of agency theory has proven problematic over time, with spotty performance regarding its predictions in areas such as incentives, monitoring, and corporate performance. Eisenhardt (1988) criticized agency theory as having few testable hypotheses and yielding mixed findings. Applying a meta-analysis methodology, Dalton, Daily, Certo and Roengpitya (2003) concluded that agency theory does not predict relationships between ownership structure and performance, nor does it reveal insights concerning organizational complexities. Such criticisms lend credence to questions about agency theory's ability to predict leadership and governance structure in corporations.

Since its inception, agency theory research has almost exclusively focused on the use of secondary data. While the use of primary data might reveal new insights, with few exceptions (Tosi, Brownlee, Silva, & Katz, 2003), little research has investigated the factors that lead to the choice of either a stewardship- or an agency-oriented corporate governance structure. This paper applies the Davis, Schoorman, and Donaldson (1997) model that, in part, predicts when an agency theory-oriented corporate governance structure will occur. Applying a matched-pair methodology with surveys of CEOs and directors at the same U.S. companies, we find agency theory's core assumption regarding the assumptions of agent opportunism hold when certain CEO psychological and company situational factors are present.

Agency Theory

Agency theory views the firm as a nexus of contracts (Jensen and Meckling, 1976) with the role of the CEO as a catalyst to initiate and manage relationships with similarly opportunistic stakeholders (Hill & Jones, 1992). The result is unstable, short-term marriages of convenience that exist as long as transacting parties reap short-term profits. Uzzi (1997) referred to such relationships as being a part of an atomistic market, typified by arm's-length transactions motivated by self-interest, with impersonal relationships, while Yan, Zhu, and Hall (2002) characterized agency-oriented principal-agent relationships as project based, and reflecting mutual mistrust that requires the formation of explicit agreements and expectations into formal contracts. However, in spite of its popularity and seemingly common sense approach to curbing the problems of opportunism or shirking, there has been a paucity of research providing clear support for agency theory (Dalton et al, 2003; Eisenhardt, 1988).

Hypotheses: Testing the Davis, Schoorman, and Donaldson Model

We test the agency theory aspects of the model Davis et al (1997) proposed to distinguish between corporate governance structures based on agency and stewardship theories. The model proposes determinants of governance structures. For a more comprehensive discussion of the theory underlying the hypotheses that follow, refer to Davis et al (1997).


Agency theory emphasizes the role of extrinsic rewards in motivating an opportunistic CEO, employing a tit-for-tat perspective in which rewards are contingent on effort and tangible results (Jensen & Meckling, 1976). …

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