Corporate Governance and Agency Conflicts |
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| Authors: | AIYESHA DEY |
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| Institution: | Graduate School of Business, University of Chicago. This paper is based on my dissertation and I would like to thank my committee members Ravi Jagannathan, Thomas Z. Lys, Robert P. Magee, and Beverly Walther for their valuable suggestions and guidance. I would also like to thank an anonymous referee, Brian Bushee, Marcus Caylor, Daniel Cohen, Ellen Engel, Tom Fields, Xiaohui Liu, N. V. Ramanan, Scott Richardson, Jonathan Rogers, Douglas Skinner (the editor), Ewa Sletten, Abbie Smith, Suraj Srinivasan, Jayanthi Sunder, Shyam V. Sunder, and the seminar participants at the 2005 AAA annual meeting, University of California at Berkeley, University of Chicago, Cornell University, Emory University, Georgia State University, Harvard Business School, University of Houston, University of Illinois, University of Michigan, MIT, Northwestern University, University of Pennsylvania, University of Southern California, University of Texas at Dallas, Tuck School of Business at Dartmouth, and University of Washington for very useful comments. I am very grateful to the Zell Center for Risk Research and the Accounting Research Center at the Kellogg School of Management, Northwestern University for financial support. All errors are my own. |
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| Abstract: | I investigate whether corporate governance is associated with the level of agency conflicts in firms. I employ exploratory principal components analysis on 22 individual governance variables to obtain seven factors that represent the different dimensions of governance for a firm. I measure the level of agency conflicts in firms based on seven proxies for agency conflicts used in the literature. I find that firms with greater agency conflicts have better governance mechanisms in place, particularly those related to the board, audit committee, and auditor. I also find that the composition and functioning of the board, the independence of the auditor, and the equity‐based compensation of directors are significantly associated with firm performance, but primarily for firms with high agency conflicts. Overall, the results support the theory that the existence and role of various governance mechanisms in a firm are a function of the level of agency conflicts in the firm. |
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