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Managerial Discretion and Corporate Governance in Publicly Traded Firms: Evidence From the Property–Liability Insurance Industry
Author(s) -
Miller Steve M.
Publication year - 2011
Publication title -
journal of risk and insurance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.055
H-Index - 63
eISSN - 1539-6975
pISSN - 0022-4367
DOI - 10.1111/j.1539-6975.2011.01415.x
Subject(s) - corporate governance , discretion , business , accounting , agency cost , principal–agent problem , liability , agency (philosophy) , incentive , finance , economics , shareholder , microeconomics , law , philosophy , epistemology , political science
Abstract We study the incremental impact of corporate governance in mitigating managerial discretion, controlling for incentive alignment of managerial ownership. We extend the managerial discretion hypothesis to predict that for firms with the same set of governance tools, those that utilize governance tools more stringently to control agency costs will command greater contracting cost advantages, leading them to specialize in business with greater managerial discretion. Using 72 publicly traded insurers from 1994 to 2006, we find evidence supporting our hypothesis. Our findings complement the finance literature that focuses on the role of financing policies in mitigating agency costs of managerial discretion.