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The construction of a firm's governance structure in a setting of uncertainty
Author(s) -
O'Donoghue Erik J.
Publication year - 2004
Publication title -
managerial and decision economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.288
H-Index - 51
eISSN - 1099-1468
pISSN - 0143-6570
DOI - 10.1002/mde.1144
Subject(s) - corporate governance , function (biology) , key (lock) , business , capital (architecture) , state (computer science) , accounting , signal (programming language) , on board , industrial organization , economics , finance , computer science , engineering , history , computer security , biology , programming language , aerospace engineering , archaeology , algorithm , evolutionary biology
Why does the firm look the way it does? Why does it have the structures it has? In particular, what is the function of the board of directors? Many papers have tried, and failed, to link the board's structure to the performance of the firm. Might the board have an alternative rationale for existence? In this paper, I explore the possibility of the board being used as a signaling device. The management, having information about the state of the world the investor does not, constructs a signal (the board of directors) to promote efficiency in an uncertain world. The construction of the board signals the state of the world to the investor, reducing the uncertainty, and thereby attracting necessary capital to the firm. I then examine the size of the signal with respect to other key firm characteristics. I find that the size of the signal diminishes as investors become more concentrated. Copyright © 2004 John Wiley & Sons, Ltd.