Corporate Governance Institutions as Signalling and Commitment Devices
Angelo S. Baglioni
Catholic University of the Sacred Heart of Milan
January 29, 2008
A model is presented, where firms issuing equity differ in the ability of their controlling shareholders to extract private benefits: thus a lemon problem, leading to cross-subsidization across issuers, is added to the moral hazard issue. A governance institution is introduced, enabling large shareholders to commit to the general interest of shareholders. The following main results are obtained. I) Such an institution is employed either as a signalling device or as a commitment tool. The relationship between governance structure (e.g. board independence) and private benefits is non-monotonic. II) The adoption of the institution is negatively related to ownership concentration, consistently with the empirical evidence that board independence is decreasing in CEO ownership. III) It is better to let the application of such governance mechanisms emerge as a market outcome, rather than be imposed by the regulation.
Number of Pages in PDF File: 20
Keywords: corporate governance, board structure, private benefits of control, (self-)regulation
JEL Classification: G34, G38
Date posted: January 31, 2008
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