Beyond self-interest: Cognitive bias as a source of agency costs
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Fadi Shehab Shiyyab 
, Ayah Mohammad Abed Alnabi, Abdallah Bader Mahmoud Alzoubi , Mohammad Jamal Azzam
This work is licensed under a Creative Commons Attribution 4.0 International License.
Abstract
Agency theory posits that the separation of ownership and control in a company allows self-interested managers to pursue their own interests by taking advantage of their superior information compared to shareholders. In this paper, we present evidence that agency costs (i.e., flawed director decision-making) can arise because of directors’ limited competence and the problem of specification of objectives, independent of information asymmetry and director independence. Using a 2x2 experimental design addressed to 180 directors, we demonstrate that anchors (Angeletos & Huo, 2021) and the mechanism of fairness (Mussel et al., 2022) may cause directors to deviate from the rational choice that maximizes a given utility function. We argue that the decision-making process can undermine a director’s ability to effectively monitor by exploiting their limited rationality, and this aspect remains inadequately specified in existing agency models. Consequently, we contribute to the literature that examines the board as a decision-making group by showcasing how a focused analysis of the decision process can unveil new mechanisms within the governance process.
Keywords: Agency Costs, Self-Interest, Board of Directors, Anchoring Effects, Ultimatum Game
Authors’ individual contribution: Conceptualization — A.M.A.A. and A.B.M.A.; Methodology — F.S.S.; Software — M.J.A.; Validation — F.S.S. and A.M.A.A.; Formal Analysis — F.S.S. and A.B.M.A.; Investigation — M.J.A.; Resources — A.M.A.A. and A.B.M.A.; Data Curation — F.S.S.; Writing — Original Draft — F.S.S. and A.M.A.A.; Writing — Review & Editing — M.J.A.; Visualization — F.S.S. and A.B.M.A.; Supervision — F.S.S.
Declaration of conflicting interests: The Authors declare that there is no conflict of interest.
JEL Classification: C91, C88, D23, G34
Received: 20.06.2023
Accepted: 04.12.2023
Published online: 06.12.2023
How to cite this paper: Shiyyab, F. S., Abed Alnabi, A. M., Alzoubi, A. B. M., & Azzam, M. J. (2023). Beyond self-interest: Cognitive bias as a source of agency costs [Special issue]. Corporate & Business Strategy Review, 4(4), 335–345. https://doi.org/10.22495/cbsrv4i4siart14
