The Internal Governance of Firms
Viral V. Acharya
New York University - Leonard N. Stern School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); New York University (NYU) - Department of Finance
Stewart C. Myers
Massachusetts Institute of Technology (MIT); National Bureau of Economic Research (NBER)
Raghuram G. Rajan
University of Chicago - Booth School of Business; International Monetary Fund (IMF); National Bureau of Economic Research (NBER)
ECGI - Finance Working Paper No. 239/2009
We develop a model of internal governance where the self-serving actions of top management are limited by the potential reaction of subordinates. Internal governance can mitigate agency problems and ensure that firms have substantial value, even with little or no external governance by investors. External governance, even if crude and uninformed, can complement internal governance and improve efficiency. This leads to a theory of investment and dividend policy, where dividends are paid by self-interested CEOs to maintain a balance between internal and external control. Our paper can explain why partnerships work well even if control rights are concentrated at the top, why a public firm’s shares have value even when shareholders have limited power, and when structuring an entity as a publicly-held firm is better than structuring it as a partnership.
Number of Pages in PDF File: 58
Keywords: Agency theory, short-termism, corporate governance, dividends, internal organization
JEL Classification: G31, G32, G34, G35, D23, L21, M51
Date posted: February 28, 2009 ; Last revised: August 9, 2010
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