entation of the board of directors in the conduct of a firm's business, and to the representation of stockholders in the corporation by the board of directors in the conduct of the firm's business (Gomez-Mejia & Balkin, 1992).
Some theorists, researchers, and observers contend that evolution in the contemporary financial environment have created conflicts between shareholders and their agents, wherein shareholder interests are no longer always accorded preference (Lamm-Tennant & Collins, 1994). Others, however, contend that economic agency is an efficient form of organization, because a corporation has no owners in a meaningful sense (Lynn & Rao, 1995). The correct view likely lies at some point between these two views.
Communication between corporate management and shareholders is also an important part of agency. Among other things, agency theory holds that a conflict may exist between objectives of (1) maximizing shareholder wealth, and (2) maximizing management's compensation (Mayers & Smith, 1992). It is assumed that, to the extent they are aware of them, investors factor agency costs into their estimations of a stock's value. It is recognized, however, that management will, at times, possess valuable information which is not available to the participants in the financial markets. It is at this point that signaling theory may come into play. If management has valuable information, it may choose to signal investors as to the content of this information. To do so effectively, however, management must not be perceived by investors to simply be attempting to better their own positions (Mitnick, 1993).
There are a number of ways in which management may signal investors without destroying their credibility. Management may hold off on exercising stock options, as an example. By acting in this manner, management may be seen to be signaling their belief that higher future earnings will cause the value of their stock optio...