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Principal–principal–agency relationships and the role of external governance
Author(s) -
Ward Damian,
Filatotchev Igor
Publication year - 2010
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.1473
Subject(s) - opportunism , agency cost , principal–agent problem , principal (computer security) , corporate governance , shareholder , business , agency (philosophy) , free cash flow , safeguarding , cash flow , moral hazard , economics , microeconomics , finance , incentive , market economy , medicine , philosophy , nursing , epistemology , computer science , operating system
This paper explores agency problems associated with mutual and joint stock organizational forms. It examines whether the independent mode of distribution acts as a governance factor that reduces principal–agent and principal–principal costs. By analyzing a 1990–1997 panel of life insurance companies this paper provides evidence that mutuals have higher principal–agent costs, but lower principal–principal costs, compared with stocks. Independent distribution mitigates both agency problems by reducing managerial expenses while safeguarding interests of policyholders. These relationships are positively moderated by product complexity and free cash flow. This is consistent with the assumption that companies that use independent agents exhibit lower levels of manager and shareholder opportunism. Copyright © 2009 John Wiley & Sons, Ltd.