Me or We: The Effects of CEO Organizational Identification on Agency Costs

Abstract

The corporate governance literature on potential remedies for the agency problem has focused largely on external control mechanisms, especially board independence. We instead consider how an internal, psychological factor—CEO organizational identification—may influence the extent to which firms incur agency costs, including those entailed by the decoupling of CEO pay and perquisites from firm performance. Our theory and findings explain why a CEO with high organizational identification may avoid pursuit of personal gains that can harm the firm he or she leads and its image. We further show how board independence is less likely to reduce agency costs when CEO organizational identification is high.