More Than 'Who Pays': Agency Theory, Multiple Principals, and Government Regulation

Substantial theoretical and empirical work has shown how various forms of governance, including incentives, can help mitigate agency conflicts. However simple agency logic is deeply complicated when a particular agent has several principals with conflicting interests and preferences. In this paper, we examine the implications of these multiple conflicting principals and the behavior of an agent, as well as the under-explored effects of government regulation on the principal- agent relationship. We do so in a particularly rich empirical context, namely, the behavior of U.S. bond rating agencies before, during, and after the financial crisis of 2008. We show that these rating agencies had multiple principal relationships and that conflicts among these principals led these agencies to favor some principals–namely their paying customers–over others. However we also show that problems arose not just from “who pays’ but also from well-intended government regulations that reduced market competition. Our findings have implications for both management theory and public policy in settings where agents serve multiple principals.