Open AccessCorporate governance and transaction cost economics: A study of the equity governance structure
Author(s) -
Jimmy A. Saravia,
Silvia L. Saravia-Matus
Publication year - 2016
Publication title -
corporate board: role, duties and composition
Language(s) - English
Resource type - Journals
eISSN - 2312-2722
pISSN - 1810-8601
DOI - 10.22495/cbv12i1art4
Subject(s) - transaction cost , corporate governance , shareholder , valuation (finance) , equity (law) , business , disadvantage , accounting , discretion , database transaction , industrial organization , finance , economics , microeconomics , political science , law , computer science , programming language
This paper extends the Transaction Cost Economics (TCE) theory of the equity governance structure by introducing a (hitherto absent) full analysis of the key TCE issue of bilateral dependency between the firm and its shareholders. In addition, the paper discusses the implications of the analysis for the topic of corporate governance and firm performance. We find that when bilateral dependency holds contractual hazards are mitigated as predicted by TCE, but that when it does not contractual safeguards are altered to the disadvantage of shareholders and managerial discretion costs increase as reflected by lower firm valuation. Importantly, our study documents for the first time a class of transactions where business relationships persist indefinitely even though transaction costs are not minimized.