Revisiting Substitution Effects of Corporate Governance Mechanisms: A Replication of Rediker and Seth’s Study

Abstract:
We conducted a replication of Rediker and Seth’s (1995) study, which proposed that corporate governance functions as a system with substitution effects existing between alternative governance mechanisms. Noting the equivocal findings in follow-up studies and some limitations in the original study, we carried out a three-step replication: using an extensive sample in the post-Sarbanes-Oxley era, accounting for factors conditioning a firm’s corporate governance decisions, and adopting an alternative approach to conceptualizing and testing substitutive relationships. In the first step, we reproduced almost all the original findings. Yet after refining the empirical model or using a different approach to examining substitution effects, we were unable to gather similar results. Our findings instantiate the importance of greater conceptual clarity and methodological rigor in corporate governance research. Our personal reflection on this replication study led us to believe that future corporate governance research would benefit from a problem-solving approach by finding effective governance mechanisms for different organizational contexts.
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