 Does external labour market activeness affect agency problem?Yuyun Claudie Huang, Jamie Yixing Tong and Joey W. Yang International Review of Financial Analysis, 2025, vol. 103, issue C Abstract: This study examines the relationship between external labour market and the agency problem. Exploiting the staggered recognition of the Inevitable Disclosure Doctrine (IDD) by US state courts to capture a drop in external labour market activeness, we examine whether and how the activeness of external labour market affects managers' empire building behaviour. We find that in IDD-recognising states, managers are less engaged in empire-building activity, thus reducing agency costs and improving firm performance. The effect is concentrated in managers with heightened career concern where their firms experience higher degrees of financial constraints or operate within an industry of more intense in-state competition. We also rule out alternative explanations in which lower levels of empire building are associated with managers pursuing a quiet life or underinvestment. Our results hold for a battery of robustness tests and offer insights into the disciplining role of external labour markets in mitigating the agency problem. Keywords: Labour market activeness; Inevitable disclosure doctrine; Agency problem; Empire building (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:103:y:2025:i:c:s1057521925002522 DOI: 10.1016/j.irfa.2025.104165 Access Statistics for this article International Review of Financial Analysis is currently edited by B.M. Lucey More articles in International Review of Financial Analysis from Elsevier |
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