45 Pages Posted: 20 Dec 2009
Date Written: December 18, 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. Internal governance works best when both top management and subordinates are important in generating cash flow. 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 firms with limited external oversight, and firms in countries with poor external governance, can have substantial value.
Keywords: governance, internal
JEL Classification: G1, F1
Suggested Citation: Suggested Citation
Acharya, Viral V. and Myers, Stewart C. and Rajan, Raghuram G., The Internal Governance of Firms (December 18, 2009). Available at SSRN: https://ssrn.com/abstract=1525606 or http://dx.doi.org/10.2139/ssrn.1525606