Competition for Managers, Corporate Governance and Incentive Compensation
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
Paolo F. Volpin
City University London - Faculty of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)
European Corporate Governance Institute (ECGI) - Finance Working Paper No. 399/2014
AFA 2011 Denver Meetings Paper
Stricter governance standards incentivize managers to perform better and thus can be used as a cheaper substitute for pay for performance. However, when managerial talent is scarce, firms’ competition to attract better managers forces firms to pay managers more and thus reduces an individual firm’s incentives to invest in corporate governance. In equilibrium, better managers end up at firms with weaker governance, and conversely, better-governed firms employ lower-quality managers. Consistent with these implications, in a sample of US firms, we show that (i) better CEOs are matched to firms with weaker corporate governance and more so in industries with stronger competition for managers, and, (ii) corporate governance is more likely to change when there is CEO turnover, with governance weakening (strengthening) when the incoming CEO is better (worse) than the departing one.
Number of Pages in PDF File: 51
Keywords: corporate governance, executive compensation, externalities
JEL Classification: D82, G21, G18
Date posted: March 19, 2010 ; Last revised: January 10, 2014
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