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Corporate Governance Institutions as Signalling and Commitment Devices

20 Pages Posted: 31 Jan 2008  

Angelo S. Baglioni

Catholic University of the Sacred Heart of Milan

Date Written: January 29, 2008

Abstract

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.

Keywords: corporate governance, board structure, private benefits of control, (self-)regulation

JEL Classification: G34, G38

Suggested Citation

Baglioni, Angelo S., Corporate Governance Institutions as Signalling and Commitment Devices (January 29, 2008). Available at SSRN: https://ssrn.com/abstract=1088368 or http://dx.doi.org/10.2139/ssrn.1088368

Angelo Baglioni (Contact Author)

Catholic University of the Sacred Heart of Milan ( email )

Largo Gemelli, n.1
Milano, 20123
Italy
390272344024 (Phone)
390272342781 (Fax)

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