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http://ssrn.com/abstract=1786703
 
 

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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

Marc Gabarro


Erasmus University

Paolo F. Volpin


City University London - Faculty of Finance; London Business School; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

February 1, 2011

AFA 2012 Chicago Meetings Paper

Abstract:     
We propose a model in which firms use corporate governance as part of an optimal compensation scheme: better governance incentivizes managers to perform better and thus saves on the cost of providing pay for performance. However, when managerial talent is scarce, firms compete to attract better managers. This reduces an individual firm's incentives to invest in corporate governance because managerial rents are determined by the manager's reservation value when employed elsewhere and thus by other firms' governance. In equilibrium, better managers end up at firms with weaker governance, and conversely, better-governed firms have lower-quality managers. Consistent with these implications, we show empirically that a firm's executive compensation is not chosen in isolation but also depends on other firms' governance and that better managers are matched to firms with weaker corporate governance.

Number of Pages in PDF File: 46

Keywords: corporate governance, executive compensation, externalities

JEL Classification: D82, G21, G18

working papers series





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Date posted: March 19, 2011  

Suggested Citation

Acharya, Viral V. and Gabarro, Marc and Volpin, Paolo F., Competition for Managers, Corporate Governance and Incentive Compensation (February 1, 2011). AFA 2012 Chicago Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1786703 or http://dx.doi.org/10.2139/ssrn.1786703

Contact Information

Viral V. Acharya
New York University - Leonard N. Stern School of Business ( email )
44 West 4th Street
New York, NY NY 10012
United States
HOME PAGE: http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/~vacharya.htm
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
New York University (NYU) - Department of Finance
Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
Marc Gabarro (Contact Author)
Erasmus University ( email )
P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands
Paolo F. Volpin
City University London - Faculty of Finance ( email )
London, EC2Y 8HB
Great Britain
London Business School
London
United Kingdom
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
HOME PAGE: http:/www.ecgi.org
Feedback to SSRN


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