The determinants of board composition: An agency theory perspective
Article first published online: 10 NOV 2006
Copyright © 1995 John Wiley & Sons, Ltd.
Managerial and Decision Economics
Volume 16, Issue 1, pages 59–69, January/February 1995
How to Cite
Bathala, C. T. and Rao, R. P. (1995), The determinants of board composition: An agency theory perspective. Manage. Decis. Econ., 16: 59–69. doi: 10.1002/mde.4090160108
- Issue published online: 10 NOV 2006
- Article first published online: 10 NOV 2006
This study examines the interrelation between board composition and variables that capture various agency and financial dimensions of the firm. The agency literature suggests that outside directors on the board provide important monitoring functions in an attempt to resolve, or at least mitigate, agency conflicts between management and shareholders. The agency literature indicates that other mechanisms such as managerial equity ownership, dividend payments, and debt leverage also serve as important devices in reducing agency conflicts in firms. This study argues and documents that an inverse relationship exists between the proportion of external members on the board and managerial stock ownership, dividend payout, and debt leverage. This is consistent with the hypothesis that individual firms choose an optimal board composition depending upon alternative mechanisms employed by the firm to control agency conflicts. Board composition is also found to be systematically related to a number of other variables including institutional holdings, growth, volatility, and CEO tenure.