Based on 259 articles published in the entrepreneurship, management, and finance literatures during 1990-2022, we provide an integrative review and synthesis of governance in new ventures. We structure our review around the formal contract between the new venture and its investors, and discuss the governance approaches of various pre-initial public offering investors across the three stages of the investment cycle: precontractual, contract design, and post-contractual. Pre-contractual governance and contract formation are explained using a signaling theory lens. To capture the intricacies of post-contractual governance, particularly for late-stage investors such as venture capitalists and private equity firms that have conflicting interests, multiple identities, and overlapping governance roles, we relax the core tenets of agency theory to direct academic inquiry toward a more sophisticated framework-multiple agency theory-that better reflects the complexities of post-contractual governance. Given the limitations of formal contracting in resolving the ambiguities of start-up governance, we integrate our narrative by using a complementary social embeddedness theory lens that highlights the importance of informal governance embedded in personal and social ties in creating implicit obligations based on trust, reciprocity, and reputation. Finally, we discuss how governance breakdowns can cause start-ups to fail, especially in their later stages.

We propose that the efficacy of hedge fund activism in overcoming managerial resistance, gaining support from wolf packs, and enhancing shareholder value is contingent on social evaluations of hedge fund legitimacy. Given the uncertainty and high costs of supporting or opposing activist campaigns, managers of target firms and other investors rely on attributes that can convey credible information about the activist in determining how to respond to the campaign. We theorize that managers and shareholders make social evaluations and judge gender-diverse HF teams as less legitimate because the presence of females in leadership roles that are considered to be masculine, especially in traditionally male-dominated sectors such as hedge funds, leads to role incongruity, thereby undermining legitimacy. Accordingly, in comparison with all male HF teams, gender-diverse HF teams face more backlash, criticism, and resistance from managers of target firms and other stakeholders. Our empirical analysis of 908 hedge fund activism campaigns involving 712 U.S. firms targeted by 295 hedge fund activists from 2010-2017 demonstrates that gender-diverse HFs face greater resistance from managers of target firms, get less wolf pack support from other shareholders, and achieve lower activism returns relative to all-male HFs.

We study the effects of terrorist attacks on firms' long-term annual management earnings forecasts bias. We find that the managers of firms located closer to the epicenters of attacks are more likely to issue optimistic long-term annual earnings forecasts relative to the managers of a control group of unaffected firms. The exposure effect is stronger for more severe terrorist events, and firms with more uncertain fundamentals and less geographic diversification. In addition, we document that managers' forecast optimism intensifies for firms with stronger negative stock market reaction to the terrorist event, for CEOs with higher ability and for companies that are more likely to issue equity or engage in acquisitions following the terrorist event. Overall, our results are consistent with the idea that long-term annual earnings forecasts are used by managers to counterbalance the short-term pessimistic response to terrorist attacks.

ABSTRACTWe examine how the threat of exit by non‐blockholders (investors with ownership <5%) relates to firms' income smoothing. Unlike informed blockholders, non‐blockholders lack private information and therefore rely more on reported accounting numbers to evaluate firm performance. To isolate the exit threat, we use the unique setting in Japan where strong firm‐centric social norms and lack of insider access lead non‐blockholding foreign institutions to influence management primarily through the threat of exit. We predict and find that foreign non‐blockholders' exit threat is positively associated with the extent of income smoothing. This effect is more pronounced for firms less embedded in Japan's stakeholder‐based system, firms with greater stock liquidity, and firms with higher US institutional ownership. In addition, smoothing associated with such an exit threat, on average, is informative. Our findings suggest that Japanese firms under non‐blockholders' exit threat increase income smoothing to reduce perceived uncertainty and that such smoothing generally meets non‐blockholders' information needs.

We integrate the governance and measurement branches in transaction cost economics to highlight how differences in performance measurement choices influence the governance of strategic assets, thereby affecting transaction costs. We develop our theory in the context of corporate governance in firms. Financiers of debt and equity employ market and hierarchical governance to safeguard generic and specific assets, respectively. Financial reporting choices constitute credible commitments to generate performance reports that are used by financiers in exercising governance. We explain why conservatism (more timely information about potential losses) bolsters the market governance of debt to reduce transaction costs for generic assets, while smoothing (informative reports about future earnings) strengthens the hierarchical governance of equity to reduce transaction costs for specific assets. We outline a research agenda incorporating the implications of performance measurement from financial reporting choices for the governance of strategic investments.

We study the effects of terrorist attacks on firms’ long-term annual management earnings forecasts bias. We find that the managers of firms located closer to the epicenters of attacks are more likely to issue optimistic long-term annual earnings forecasts relative to the managers of a control group of unaffected firms. The exposure effect is stronger for more severe terrorist events, and firms with more uncertain fundamentals and less geographic diversification. In addition, we document that managers’ forecast optimism intensifies for firms with stronger negative stock market reaction to the terrorist event, for CEOs with higher ability and for companies that are more likely to issue equity or engage in acquisitions following the terrorist event. Overall, our results are consistent with the idea that long-term annual earnings forecasts are used by managers to counterbalance the short-term pessimistic response to terrorist attacks.

We construct measures of accounting regulations and enforcement mechanisms that are specific to a country's banking industry. Using a sample of major banks in 37 economies, we find that the informativeness of banks' financial statements, measured by the value relevance of earnings and common equity, is higher in countries with stricter bank accounting regulations and countries with stronger enforcement. These findings suggest that superior bank accounting and enforcement mechanisms enhance the informativeness of banks' financial statements. In addition, we find that the effects of bank accounting regulations are more pronounced in countries with stronger enforcement in the banking industry, suggesting that enforcement is complementary to bank accounting regulations in achieving higher value relevance of financial statements. Our study has important policy implications for bank regulators.

Although the behavioral theory of the firm posits that performance shortfalls trigger problemistic search, the actual performance consequences of problemistic search remain an open question. We argue that certain cognitive, affective, and behavioral mechanisms triggered by performance shortfalls make managers more aware, attentive, motivated, and disciplined, resulting in adaptation, learning, and enhanced firm value. Furthermore, differences in the extent to which managers feel pressured to adapt, and have the ability to adapt, can shape managerial awareness, motivation, and capability, and hence firm value. Our empirical analysis, using data for a sample of US manufacturing firms (1994–2013), confirms that problemistic search enhances firm value, and this association is strengthened when firms face greater pressure to adapt or have a greater ability to adapt.

The negative association between risk and return is paradoxical because risk-averse managers should only expose themselves to higher risk for higher returns. The paradox is resolved, however, if we recognize that risk-averse managers may be taking decisions that pose risk for shareholders and not for their own careers. We draw on the career concerns literature to explain why decisions that pose risk to shareholder returns can enhance managerial careers. We provide evidence that the risk-return paradox is exacerbated by agency problems that contribute to career concerns (i.e., CEO career horizon), and mitigated by various governance mechanisms that curb the agency problem by aligning managers with shareholders (such as monitoring by the market for corporate control, large block owners, institutional owners, vigilant board, and CEO incentive alignment). Our study sheds light on the role of career concerns and corporate governance in resolving the risk-return paradox.

The behavioral theory of the firm (BTF) posits that managers engage in problemistic search when they experience attainment discrepancy (performance falls below aspirations), in order to raise performance above the aspiration level. Yet, the performance consequences of problemistic search remain an open question. We find that investment in search, triggered by negative performance feedback, enhances firm value. We infer that performance discrepancy facilitates adaptation and improves performance via focused managerial attention and self- discipline. We also find that performance shortfalls relative to aspiration do not induce “swing for the fences” investment in search (by gambling on risky projects), and instead foster prudent value-enhancing investments that enhance the probability of making large gains and reduce the volatility of the firm’s stock returns. Furthermore, we also find that the threat of bankruptcy, the availability of slack and corporate governance mechanisms do not have any effect on the performance consequences of search, reinforcing our view of the primacy of performance feedback in value creation from investment in search.

We examine the effect of second-generation state antitakeover laws (ATLs) on accounting conservatism. We adopt a novel methodology that corrects for selection bias resulting from firms’ endogenous incorporation decision. Focusing on the period from when these ATLs became constitutional, we find a negative association between ATLs and conservatism. Our results suggest that ATLs decrease debtholder demand for conservatism by reducing agency costs of debt.

For a panel of U.S. firms, we employ system GMM to estimate a dynamic model of the relationship between firm performance and governance characteristics including board leadership structure. Our results provide convincing evidence that a joint leadership structure, i.e., CEO duality has statistically significant negative impacts on firm performance. We also document that this effect is positively moderated by board independence. The results are robust across a number of sensitivity tests. The findings are consistent with arguments advanced by both agency theorists and some management scholars that though duality might reduce firm performance through managerial entrenchment, it can provide benefits to the firm in the presence of board vigilance.

Using a sample of U.S. multinational enterprises, we examine whether internal information aggregation affects the quality of voluntary disclosure to external users, proxied by management earnings forecasts accuracy. We find that management earnings forecasts are less accurate when the internal information reported to a firm’s general manager is more aggregated. In addition, we show that financial analysts’ reactions to management forecasts are weaker for firms with a higher level of internal information aggregation. We also document that firms with higher internal information aggregation are more likely to under-invest and experience slower sales growth. Overall, our study suggests that internal information aggregation plays an important role in shaping multinational enterprises’ external financial disclosure behavior.

We explore the effect of corporate opacity on the relation between staggered boards and firm value. We find that through mitigating takeover pressure, staggered boards become increasingly beneficial to firm value as opacity increases. In addition, we document that staggered boards reduce value only in transparent firms. Additional tests indicate that, as opacity increases, staggered boards bear an increasingly positive relation to research and development and CEO pay-performance sensitivity. Taken together, these results suggest that corporate opacity affects the value impact of takeover protection.

This study examines the causal link between a firm's leverage decisions and the characteristics of its CEO bonus plans. Results from a simultaneous equations model strongly suggest that highly levered firms are less likely to use return on equity (ROE) or ROE-based accounting performance measures to determine executive bonuses. Estimates also indicate that firms with fewer debt covenants, higher interest rates on debt, and a greater proportion of executive pay in the form of stock options are less likely to adopt ROE-based measures for use in CEO bonus plans. These findings lend strong support to the efficient contracting hypothesis. The conflicting interests of corporate stakeholders, especially between stockholders and creditors, encourage firms to tie executive pay to performance metrics like return on assets (ROA) that will strike the optimal balance between the agency costs of debt and the agency costs of equity.Data availability: all data are available from public sources.

We explore the relation between family ownership and corporate investment policy. Our analysis centers on two incentives, risk aversion and extended investment horizons, which potentially influence the level and type of investments that family firms undertake. We find that family firms devote less capital to long-term investments than firms with diffuse ownership structures. When dividing long-term investment into its two components of R&D and capital expenditures, we note that family firms, relative to nonfamily firms, prefer investing in physical assets relative to riskier R&D projects. Additional tests indicate that family firms receive fewer patent citations per dollar of R&D investment relative to nonfamily firms. Overall, all empirical results indicate that family preferences for lower firm risk, across all family sub-types, affects corporate R&D spending and capital expenditures. (C) 2012 Elsevier B.V. All rights reserved.

Meeting or beating analysts’ forecasts is a topic of considerable interest in the academic and business communities. Some studies indicate a favorable market response when firms meet or beat analysts’ earnings forecasts, but others suggest managers opportunistically manage earnings to achieve earnings targets. We investigate the relation between corporate governance mechanisms and meeting or exceeding analysts’ expectations and find that attributes of corporate governance are related to the likelihood of consistently meeting or exceeding consensus forecasts. We extend current literature by showing that some attributes of strong corporate governance mechanisms lower agency costs associated with consistently meeting or beating analysts’ expectations. We also find that compensation committees reward managers for consistently meeting or beating analysts’ forecasts.

This paper investigates the relationship between several different CEO compensation components and several firm performance metrics using canonical correlation analysis (CCA). The principal findings presented in this paper offer evidence supporting the pay-performance relationship in corporate America. CEOs bonuses are closely associated with accounting measures of performance whereas CEO’s long-term compensation is directly linked to firm’s market performance. Furthermore, a substantial portion of the variance in CEOs bonus is explained by firm performance variables. Firm performance measures have some predictive power for CEO bonus but very little predictive power for other compensation measures.