An Empirical Investigation of Internal Governance
50 Pages Posted: 18 Mar 2010 Last revised: 26 Jul 2017
Date Written: July 25, 2017
Acharya, Myers, and Rajan (2011) theorize that CEO rent extraction is constrained by subordinate managers. This internal governance works best when the relative contributions of CEOs and managers to output are balanced. Consistent with the theory, we ﬁnd a hump-shaped relation between relative contributions and corporate investment, and between relative contributions and ﬁrm performance. These hump-shaped relations are stronger for ﬁrms with older CEOs, for ﬁrms more likely to promote insiders to CEO, for ﬁrms with non-founder CEOs, and for ﬁrms in growing industries. Other forms of governance do not diminish the importance of internal governance, and the results are robust to endogeneity concerns.
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