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

✍ Scribed by Erik J. O'Donoghue

Publisher
John Wiley and Sons
Year
2004
Tongue
English
Weight
132 KB
Volume
25
Category
Article
ISSN
0143-6570

No coin nor oath required. For personal study only.

✦ Synopsis

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 Β© 2004 John Wiley & Sons, Ltd.

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