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Do the contingencies of external monitoring, ownership incentives, or free cash flow explain opposing firm performance expectations?

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Abstract

Neoclassical and strategy frameworks stipulate that managers promote corporate performance and shareholder interests in their resource allocation decisions. Agency related works anticipate that executives seek their own personal interests at a cost to performance and shareholder wealth in their resource allocation choices. In this study, an attempt is made to resolve these conflicting anticipations. We propose that changes in levels of resource allocations (advertising expenditure, R&D spending, capital intensity) may be more positively associated with changes in levels of subsequent corporate performance for firms with greater external monitoring or with higher CEO ownership incentives. We also propose that changes in levels of resource allocations may directly (inversely) affect changes in levels of subsequent performance of the actively (passively) monitored enterprises, lacking (possessing) free cash flow. Additionally, we propose that changes in levels of resource allocations may directly (inversely) affect changes in levels of subsequent performance of firms with high (low) CEO ownership incentives in the absence (presence) of free cash flow. Regression models are utilized to test our proposals on a longitudinal sample obtained from the Compustat database. The empirical findings are generally supportive of our proposals.

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Authors and Affiliations

  1. Fogelman College of Business and Economics, The University of Memphis, Memphis, TN, 38152, USA

    Peter Wright

  2. College of Administration and Business, Louisiana Tech University, P. O. Box 10318, Ruston, LA, 71272, USA

    Mark Kroll

  3. Department of Management and Marketing, Texas A&M International University, Laredo, TX, 78041-1900, USA

    Ananda Mukherji

  4. Tabor school of Business, Millikin University, DeCater, IL, 62522, USA

    Michael L. Pettus

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  1. Peter Wright
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  2. Mark Kroll
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  3. Ananda Mukherji
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  4. Michael L. Pettus
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Correspondence to Peter Wright.

Appendix

Appendix

Appendix 1 Distribution of high–q strong governance versus low-q weak governance firm year observations by two-digit SIC codes
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Wright, P., Kroll, M., Mukherji, A. et al. Do the contingencies of external monitoring, ownership incentives, or free cash flow explain opposing firm performance expectations?. J Manag Gov 13, 215–243 (2009). https://doi.org/10.1007/s10997-008-9063-8

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