The construction of a firm's governance structure in a setting of uncertainty

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 exis...

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Bibliographic Details
Published in:Managerial and decision economics 2004-07, Vol.25 (5), p.221-229
Main Author: John, O'Donoghue, Erik
Format: Article
Language:English
Subjects:
Boards of directors
Capital investments
Capital management
Capital structure
Collusion
Contract management
Corporate governance
Cost functions
Equity
Financial management
Financial performance
Incentives
Investment strategies
Investors
Studies
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Summary: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.
ISSN:0143-6570
1099-1468
DOI:10.1002/mde.1144