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

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  • Erik J. O'Donoghue

    (ERS-USDA, 1800 M St. NW, Washington, DC 20036, USA)

Abstract

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. Copyright © 2004 John Wiley & Sons, Ltd.

Suggested Citation

  • Erik J. O'Donoghue, 2004. "The construction of a firm's governance structure in a setting of uncertainty," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 25(5), pages 221-229.
    • Handle: RePEc:wly:mgtdec:v:25:y:2004:i:5:p:221-229
    DOI: 10.1002/mde.1144
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    References listed on IDEAS

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    7. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817.
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    1. Pugliese, Amedeo & Minichilli, Alessandro & Zattoni, Alessandro, 2014. "Integrating agency and resource dependence theory: Firm profitability, industry regulation, and board task performance," Journal of Business Research, Elsevier, vol. 67(6), pages 1189-1200.

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