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Examining the Relationships Between Monitoring and Incentives in Corporate Governance*
Author(s) -
Rutherford Matthew A.,
Buchholtz Ann K.,
Brown Jill A.
Publication year - 2007
Publication title -
journal of management studies
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 4.398
H-Index - 184
eISSN - 1467-6486
pISSN - 0022-2380
DOI - 10.1111/j.1467-6486.2007.00683.x
Subject(s) - incentive , corporate governance , business , agency (philosophy) , principal–agent problem , context (archaeology) , shareholder , control (management) , variety (cybernetics) , accounting , public relations , economics , finance , microeconomics , political science , management , sociology , computer science , paleontology , social science , artificial intelligence , biology
Agency theory focuses on monitoring and incentives as two solutions to agency problems. Prior research suggests that monitoring and incentives may act either as substitutes or as complements, and that the context of the agency relationship plays a major role in determining the direction of the relationship between them. In a corporate governance setting, we contend that board information and boards' usage of CEO control mechanisms are best viewed as complements. Thus, we hypothesize that boards' information gathering behaviour will be positively related to boards' usage of CEO control mechanisms. Using primary and secondary data from 149 US firms, we find that increases in boards' information gathering are associated with increases in boards' usage of managerial controls. These findings suggest that information and managerial control mechanisms act as complements in the governance context, and that boards take a variety of actions to protect the interests of shareholders.