The Influence Of Firms' Vertical Boundaries And Corporate Governance On Agency Cost

There are some theories can explain how to determine vertical boundaries of enterprises such as New Classical Economics, Transaction Cost Theory and the Firms' Capabilities Theory. Though these theories can explain how to determine vertical boundaries of enterprises in some degree, they are more suitable for firms that ownership and control are not separated. While boundaries of enterprises are also affected by agents'preference because of the separation of ownership and control. With the expansion of firms'vertical boundaries, the pressure and risk of product competition faced by agents will be reduced, information asymmetry between agents and owners will be furtherly aggravated, meanwhile agents also have greater power. Are the agency problems more prominent in the enterprises with larger vertical boundaries for the changes as mentioned earlier? Agency problems could be alleviated through the internal governance mechanism which are brought after the implementation of vertical integration strategy?In this paper, the research began with the influence brought by the expansion of enterprises'vertical boundaries and got conclusions through theoretical analysis, mathematical model derivation and empirical regression. The results showed that agency problems are more serious and agency costs are bigger with the increasing of firms'vertical boundaries. Agency costs are reduced with the increasing of firms' vertical boundaries in the subsample whose agents hold shares because of the coincidence of their interests. Different corporate governance factors have different effects on agency problems. Some corporate governance factors can reduce agency costs, while the others can not. The author got a comprehensive indicator to measure the level of corporate governance by principal component analysis. The results showed that the influence of the vertical boundary on the agency costs will be weakened in the enterprise with higher level of comprehensive corporate governance after putting comprehensive indicator into the regression models.In order to alleviate agency problems, the paper puts forward suggestions namely being careful on the implementation of vertical integration strategy, the construction of professional manager market, and the strengthening of enterprise system.