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Managerial Discretion and Corporate Governance in Publicly Traded Firms: Evidence From the Property–Liability Insurance Industry


  • I would like to thank Robert Hoyt, Steven Pottier, David Eckles, Thomas Berry-Stoelzle, James Hilliard, and two anonymous referees. In addition, I thank seminar participants at Temple University, Missouri State University, Saint Joseph's University, and the 2008 Southern Risk and Insurance Association.


We study the incremental impact of corporate governance in mitigating managerial discretion, controlling for incentive alignment of managerial ownership. We extend the managerial discretion hypothesis to predict that for firms with the same set of governance tools, those that utilize governance tools more stringently to control agency costs will command greater contracting cost advantages, leading them to specialize in business with greater managerial discretion. Using 72 publicly traded insurers from 1994 to 2006, we find evidence supporting our hypothesis. Our findings complement the finance literature that focuses on the role of financing policies in mitigating agency costs of managerial discretion.