Abstract
This study examines the relationship between external labour market and the agency problem. Exploiting the staggered recognition of the Inevitable Disclosure Doctrine (IDD) by US state courts to capture a drop in external labour market activeness, we examine whether and how the activeness of external labour market affects managers' empire building behaviour. We find that in IDD-recognising states, managers are less engaged in empire-building activity, thus reducing agency costs and improving firm performance. The effect is concentrated in managers with heightened career concern where their firms experience higher degrees of financial constraints or operate within an industry of more intense in-state competition. We also rule out alternative explanations in which lower levels of empire building are associated with managers pursuing a quiet life or underinvestment. Our results hold for a battery of robustness tests and offer insights into the disciplining role of external labour markets in mitigating the agency problem.
RAS ID
78808
Document Type
Journal Article
Volume
103
Funding Information
Australian Government Research Training Program Scholarship
School
School of Business and Law
Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 License.
Publisher
Elsevier
Identifier
Yuyun Claudie Huang: https://orcid.org/0000-0001-5366-6568
Comments
Huang, Y. C., Tong, J. Y., & Yang, J. W. (2025). Does external labour market activeness affect agency problem?. International Review of Financial Analysis, 103, 104165. https://doi.org/10.1016/j.irfa.2025.104165