Agency Problems and the Corporate Charter

David Mayers and Clifford W. Smith

The Journal of Law, Economics, and Organization, 2005, vol. 21, issue 2, 417-440

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.

Date: 2005
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