Substitution Effects of Alternative Governance Mechanisms: Evidence from China

Corporate governance addresses many governance mechanisms to reduce the agency problems. Recently, more interest has been aimed at examining both individual and joint effects of various mechanisms on some measure of the magnitude of the agency problem. However the results mixed. In this paper, substitution effects of key control mechanisms were examined. These mechanisms include equity ownership, boards of directors, managerial compensation and debt. Consider about endogeneity, six simultaneous equations model were presented to capture the interrelationships among the four control mechanisms. Then, ordinary least square and two-stage least square estimated the equations with panel data during the period 2002-2004 in a 513 sample of listed firms. The results supported the view that there is interdependence among various governance mechanisms and the choice of one mechanism will depend on the choice of another.