National Governance Bundles and Corporate Agency Costs: A Cross‐Country Analysis

Abstract

Manuscript Type Conceptual and empirical Research Question/Issue Comparative corporate governance performance across countries cannot be captured adequately by ranking of single or a few national governance factors (NGFs). But it is also intractable to undertake separate comparative analyses of the large number of NGFs that potentially impact corporate governance mechanisms. How can NGFs be combined into national governance bundles (NGBs) that are informative of the level of agency costs at the firm level and are also convenient to use in comparative analyses? Research Findings/Insights We theoretically motivate and empirically identify the components of two NGBs that, at the firm level, have especially significant impact on controlling shareholder agency costs and the agency costs of debt financing, respectively. These NGBs (1) allow consolidation of the effects of various individual NGFs that have been considered separately in the literature, (2) reveal the complementarity and substitutability effects among NGFs and between NGFs and firm governance mechanisms, and (3) are convenient to apply through aggregate bundle scores. Theoretical/Academic Implications Forming NGBs by combining NGFs that have especially significant impact on specific agency costs is useful both theoretically and empirically. The theoretical analysis guides the identification of NGFs that may be especially influential on specific agency costs and these predictions can be verified empirically. Examining the effects of NGFs on the relation of firm‐level governance mechanisms and agency costs is useful in understanding the links between national‐ and firm‐level governance variables. Practitioner/Policy Implications The parsimony and tractability afforded by the NGBs in understanding various aspects of corporate governance performance should prove useful to policymakers, international business managers, and investors. By providing readily available indicators of different agency costs at the firm level, these bundles can guide policymakers in setting the legal and regulatory framework for corporate governance at the national level.