The Entrenchment Problem, Corporate Governance Mechanisms and Firm Value
University of Oulu - Department of Accounting and Finance
University of Umea
Mikko P. Zerni
University of Vaasa - Department of Accounting and Finance
October 20, 2009
Contemporary Accounting Research, Forthcoming
In this paper, we investigate the effectiveness of two main corporate governance mechanisms, namely the board of directors and auditing, in mitigating the equity discounts arising from the potential entrenchment problem between inside and outside shareholders. Overall, the empirical results suggest that both boards with equity incentives and higher quality auditors may act as effective governance mechanisms with positive valuation implications. The monitoring incentives of the board of directors appear to play a key governance role. Specifically, we find that boards where board members have invested their personal wealth in the firm demand more stringent auditing, claim higher dividends and thereby limit the agency problem of free cash flow.
Number of Pages in PDF File: 59
Keywords: Corporate Governance, Auditing, Board of Directors, Entrenchment, Firm value
JEL Classification: M42, G3Accepted Paper Series
Date posted: February 9, 2010 ; Last revised: July 1, 2011
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