- New Horizons in Regional Science series
Edited by Charlie Karlsson, Börje Johansson and Roger R. Stough
Chapter 12: Agency Control Mechanisms and Innovative Effort
Raquel Ortega-Argilés, Rosina Moreno and Jordi Suriñach Caralt1 12.1 INTRODUCTION The separation of ownership and control in the firm causes problems because of the informational asymmetries between managers and owners, which are known as agency problems. One of the most important consequences of this kind of problem is their bad influence in the firm’s decisionmaking process and investment decisions related to the firm’s growth in particular. In order to alleviate this kind of problem arising from the owner’s nondirect supervision of the manager’s decision, the ownership of the firm may develop several mechanisms that align the objectives pursued by the managers and owners. Control mechanisms are alternative ways of providing managers with incentives to achieve the owner’s objective of results that maximize profits. Inclusion of owners in the decision-making process, debt financing, ownership concentration in a few hands, providing the manager with company shares and the potential managerial labour market are some of these. The extent to which several of the control mechanisms are used is decided within the firm. The use of a mechanism will be increased until the firm’s marginal costs and marginal profits are equal. A number of empirical studies have analysed the effect that several mechanisms for controlling manager–shareholder agency problems have on firm performance and also on different types of investments. Some works analyse the nature of the determinants in the creation of the company’s value, introducing variables which define the agency control mechanisms (Agrawal and Knoeber, 1996; Hermanlin and Weisbach, 1991;...
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