Managerial response to constitutional constraints on shareholder power

Brian L. Connelly, Wei Shi, Jinyong Zyung

Research output: Contribution to journalArticlepeer-review

16 Scopus citations


Research summary: We examine whether top managers engage in misconduct, such as illegal insider trading, illegal stock option backdating, bribery, and financial manipulation, in response to the presence, or absence, of governance provisions that impose constitutional constraints on shareholder power. Within the agency framework, shareholders typically oppose governance provisions that limit their power because those provisions could undermine shareholder influence and increase agency costs. However, when shareholders support provisions that constrain their power, managers could respond positively by refraining from self-interested behavior in the form of managerial misconduct. We find this to be especially true in industries where these governance provisions are particularly relevant to managers and in scenarios where CEOs do not also serve as board chair. Managerial summary: In recent years, shareholders have become central to organizations and the managers who run them. Shareholders and managers establish a rapport with one another, such that the behavior of one affects the behavior of the other. One of the most consequential decisions shareholders can make pertains to the reach of their influence: They can choose to impose strict governance over firms they own or they can allow for constitutional constraints that limit shareholder power. When they act in the mutual interest of managers by allowing such constraints, we find that managers respond in kind by refraining from bad behavior, such as illegal stock options backdating, insider trading, and financial manipulation. This is especially true in industries and scenarios in which shareholder pressure is most relevant to managers.

Original languageEnglish (US)
Pages (from-to)1499-1517
Number of pages19
JournalStrategic Management Journal
Issue number7
StatePublished - Jul 1 2017
Externally publishedYes


  • agency theory
  • constitutional limit provisions
  • corporate governance
  • managerial misconduct
  • social exchange theory

ASJC Scopus subject areas

  • Business and International Management
  • Strategy and Management


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