Collusion and Incentives: The Role of Expertise in Corporate Reorganization
Posted: 16 Mar 2010 Last revised: 3 Feb 2012
Date Written: March 14, 2010
The paper shows that collusion between the CEO of a firm and outside expert generates a conflict between ex-ante provision of effort and ex-post disclosures of bad news if the alliance tends to hide early warning signals that call for restructuring of firm’s assets. This tension is resolved by a compensation scheme that incorporates both bonus and golden parachutes or severance payments for the CEO. The latter exacerbates incentive problems and imposes extra costs on shareholders and makes the process of reorganization based on such information costlier. A greater bargaining power of the expert, however, reduces overall CEO pay and also preserves incentives. On the other hand, public information such as stock price, media reports serve as second opinion about firm’s disclosure of information that make it harder for the collusive alliance to earn larger amount of information rents. The paper also derives direct empirical implications linking management compensations to voluntary disclosures of bad news and frequency of restructurings of assets for both private and public firms.
Keywords: Collusion, Information Asymmetry, Incentives, CEO compensations
JEL Classification: D82, D86, G34
Suggested Citation: Suggested Citation