Agency theory predicts that the right incentives will align agents’ interests with those of principals. However, the resource-based view suggests that to be effective, the incentive to deliver must be paired with the ability to deliver. Without requisite ability, an agent's incentives may yield the desired alignment but not the desired results. Using the corporate boards of Fortune 500 firms as an empirical context, this study shows that the presence of directors who lack top-level business experience but have large ownership stakes is negatively associated with firm value, an effect that becomes larger as the number of such directors on a board increases. Furthermore, firm value rises after such directors depart from corporate boards, with the greatest increases occurring in firms where the reduction in the number of these directors is the largest. While agency theory highlights the importance of having the right incentives in place, this research suggests that doing so can be ineffective if the right resources are not in place as well.
This paper investigates “legacy divestitures,” the sale or spinoff of a company's original, or “legacy” business. The central tension considered in this work is that the historical presence of a firm's legacy business should simultaneously make that unit very interdependent with the company's remaining operations and make the firm's managers highly likely to take those same interdependencies for granted. Consistent with these predictions, the post-divestiture operating performance of firms that divest their legacy businesses falls short of that of firms that retain comparable legacy units, especially when the divested unit operates in the same industry as others of the divesting firm's businesses. Newer CEOs are more likely to undertake legacy divestitures than their longer-tenured peers, and the most recently-appointed CEOs undertake the most costly legacy divestitures. In sum, this paper provides insights into how historical interdependencies create value in diversified firms, as well as the decision-making processes managers follow in overseeing these companies.
This article investigates how securities analysts help investors understand the value of diversification. By studying the research that analysts produce about companies that have announced corporate spin-offs, we gain unique insights into how analysts portray diversified firms to the investment community. We find that while analysts’ research about these companies is associated with improved forecast accuracy, the value of their research about the spun-off subsidiaries is more limited. For both diversified firms and their spun-off subsidiaries, analysts’ research is more valuable when information asymmetry between the management of these entities and investors is higher. These findings contribute to the corporate strategy literature by shedding light on the roots of the diversification discount and by showing how analysts’ research enables investors to overcome asymmetric information.
Andersen’s exit from the already-concentrated market for auditing services is shown to have increased market concentration and audit fees. Changes in market concentration are found to be significantly related to changes in audit fees, suggesting that the structure-performance hypothesis is applicable to the post-Andersen accounting industry and that the “Final Four” accounting firms may have exercised market power in this environment. The paper concludes with a discussion of the implications of Andersen’s exit from the market.