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Agency Problems and the Corporate Charter

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  • David Mayers
  • Clifford W. Smith

Abstract

Theory says that mutual and stock organizational forms have a comparative advantage in specific contracting dimensions. We examine corporate charter and bylaw provisions from a sample of insurance companies with incorporations spanning the 19th century. We find that charter and bylaw provisions differ in predictable ways across organizational forms. For example, mutual charters and bylaws are more likely than those of stock companies to include provisions restricting the company's operating policies (because mutuals have higher costs of controlling management discretion). Our examination supports the proposition that incentive problems between owners and managers are more pronounced in mutuals. This implies an offsetting benefit, which we interpret as the internalization of owner-customer incentive conflict problems. Copyright 2005, Oxford University Press.

Suggested Citation

  • David Mayers & Clifford W. Smith, 2005. "Agency Problems and the Corporate Charter," Journal of Law, Economics, and Organization, Oxford University Press, vol. 21(2), pages 417-440, October.
  • Handle: RePEc:oup:jleorg:v:21:y:2005:i:2:p:417-440
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    File URL: http://hdl.handle.net/10.1093/jleo/ewi016
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    Cited by:

    1. Duru, Augustine & Wang, Dechun & Zhao, Yijiang, 2013. "Staggered boards, corporate opacity and firm value," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 341-360.
    2. Laux, Christian & Muermann, Alexander, 2010. "Financing risk transfer under governance problems: Mutual versus stock insurers," Journal of Financial Intermediation, Elsevier, vol. 19(3), pages 333-354, July.
    3. Larcker, David F. & Ormazabal, Gaizka & Taylor, Daniel J., 2011. "The market reaction to corporate governance regulation," Journal of Financial Economics, Elsevier, vol. 101(2), pages 431-448, August.
    4. Brickley, James A. & Zimmerman, Jerold L., 2010. "Corporate governance myths: Comments on Armstrong, Guay, and Weber," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 235-245, December.
    5. Laux, Christian & Muermann, Alexander, 2006. "Mutual versus stock insurers: Fair premium, capital, and solvency," CFS Working Paper Series 2006/26, Center for Financial Studies (CFS).
    6. Braun, Alexander & Schmeiser, Hato & Rymaszewski, Przemysław, 2015. "Stock vs. mutual insurers: Who should and who does charge more?," European Journal of Operational Research, Elsevier, vol. 242(3), pages 875-889.
    7. Wald, John K. & Long, Michael S., 2007. "The effect of state laws on capital structure," Journal of Financial Economics, Elsevier, vol. 83(2), pages 297-319, February.
    8. Mersland, Roy & Strøm, R. Øystein, 2007. "Microbanks: Ownership, performance and social tradeoffs - a global analysis," MPRA Paper 2063, University Library of Munich, Germany.

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