Do the contingencies of external monitoring, ownership incentives, or free cash flow explain opposing firm performance e
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Do the contingencies of external monitoring, ownership incentives, or free cash flow explain opposing firm performance expectations? Peter Wright Æ Mark Kroll Æ Ananda Mukherji Æ Michael L. Pettus
Published online: 15 August 2008 Ó Springer Science+Business Media, LLC. 2008
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 P. Wright (&) Fogelman College of Business and Economics, The University of Memphis, Memphis, TN 38152, USA e-mail: [email protected] M. Kroll College of Administration and Business, Louisiana Tech University, P. O. Box 10318, Ruston, LA 71272, USA e-mail: [email protected] A. Mukherji Department of Management and Marketing, Texas A&M International University, Laredo, TX 78041-1900, USA e-mail: [email protected] M. L. Pettus Tabor school of Business, Millikin University, DeCater, IL 62522, USA e-mail: [email protected]
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(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. Keywords Agency theory Resource allocation Free cash flow Monitoring
Studies of the effects of resource allocations on firm performance have been reported in a variety of literatures (e.g., Holmstrom and Ricart i Costa 1986; Burgelman and Maidique 1989; Michelson 1991; Harrison et al. 1993; Hirshleifer 1993; Jensen 1993; Bagwell and Ramey 1994; Thomas 1996; Chung et al. 1998; Griliches 1998; Hall 1998; David et al. 2001; Joseph and Richardson 2002; Greve 2003; Lee and O’Neill 2003; Kor 2006). Some of these studies have been based on the traditional neoclassical economics and strategy frameworks. In these frameworks, the premise is that executives seek to enhance the value of the firm. Other studies have been based on an agency theoretical framework with the premise that managers primarily seek to promote their own interests to the detriment of firm valu
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