Examining the Relationships Between Monitoring and Incentives in Corporate Governance*

Abstract

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. Copyright Blackwell Publishing Ltd 2007.

Top executive pay and firm performance in China

“…This interesting finding, of uniformity despite heterogeneous governance systems and other institutions, is mirrored by parallel results in relation to the uniform responsiveness of CEO dismissal to share price declines in Germany, Japan and the USA (Kaplan, 1997(Kaplan, , 1999. It would appear that different governance systems can achieve similar outcomes on executive labour and product markets (Grandori, 2004), and that different governance elements may act as substitutes for each other (Rutherford, Buchholtz, & Brown, 2007).…”

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Does Corporate Governance Influence Convertible Bond Issuance?

“…While early studies examine individual corporate governance mechanisms in isolation, a more recent stream of articles documents that firms tend to use governance mechanisms as substitutes (e.g., Westphal and Zajac, 1994;Rediker and Seth, 1995;Agrawal and Knoeber, 1996;Singh and Davidson, 2003;Rutherford et al, 2007) or as complements (Danielson and Karpoff, 1998;Cremers and Nair, 2005;Schepker and Oh, 2012). A common feature of these studies is that they focus on traditional corporate governance measures such as board and ownership structure.…”

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