The Symbolic Management of Stockholders: Corporate Governance Reforms and Shareholder Reactions

Jensen and Meckling (1976) defined agency costs as the sum of (1) monitoring expenditures to assure that an agent is acting in the principal's interests, (2) bonding expenditures made by the agent to reassure the principal, and (3) the remaining costs due to unresolved conflicts between agent and principal (see also Barney and Ouchi, 1986: 209-210). This paper examines the consequences of symbolic action in corporate governance. Specifically, we examine (1) whether the stock market reacts favorably to specific governance mechanisms that convey the alignment of CEO and shareholder interests, such as the adoption of long-term incentive plans (LTIPs), even if such plans are not actually implemented, (2) whether providing agencyrelated explanations for LTIPs affects the stock market response, and (3) whether the symbolic adoption of LTIPs deters other governance reforms that would reduce CEOs' control over their boards. Analysis of data from over 400 corporations over a ten-year period suggests that symbolic corporate actions can engender significant positive stockholder reactions and deter other, more substantive governance reforms, thus perpetuating power imbalances in organizations. We discuss implications for institutional and agency-based perspectives on organizations.'