Corporate Governance, Principal-Principal Agency Conflicts, and Firm Value in European Listed Companies

Manuscript Type: Empirical Research Question/Issue: Using the conceptual framework of Aguilera, Filatotchev, Gospel, and Jackson, this study examines the impact of principal-principal agency problems on the quality and effectiveness of corporate governance structures in listed companies from 14 European countries between 1999 and 2003. Specifically, we develop an index on the severity of the agency conflict and investigate whether this index explains the quality of governance structures. We also examine whether, given certain environmental complementarities, this index influences the effectiveness of good governance structures. Research Findings/Insights: Using a simultaneous equations model, we find that the conflict index affects the quality and effectiveness of corporate governance. When agency conflicts are severe, the costs of installing good governance are high for the majority shareholders and the quality is low. Once installed, however, good governance structures complemented with a high-quality disclosure environment leads to higher firm value, especially in companies with a severe agency conflict. Theoretical/Academic Implications: Our study adds to the governance literature by focusing on the costs of installing good governance. Further, it contributes to principal-principal agency studies by examining a number of developed countries and by developing a measure for the severity of the principal-principal conflict. Finally, our study adds to institutional theory by showing how companies' corporate governance choices are affected by the severity of agency conflicts and the way corporate governance is regulated. Practitioner/Policy Implications: Our analyses suggest that regulatory approaches to corporate governance issues should move away from a "one-size-fits-all" policy toward one that takes into account the organizational and environmental context. By demonstrating that the severity of principal-principal agency conflicts results in significant differences in the existence and effectiveness of corporate governance, our empirical evidence can guide regulators in developing new regulations or laws intended to reduce private benefits of control or improve the disclosure environment.