Corporate Control and Executive Selection

51 Pages Posted: 22 Nov 2010

See all articles by Francesco Lippi

Francesco Lippi

University of Sassari

Fabiano Schivardi

Einaudi Institute for Economics and Finance (EIEF); Luiss Guido Carli - Department of Economics and Finance; Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research; Centre for Economic Policy Research (CEPR)

Date Written: September 2010

Abstract

We present a model in which the owner of the firm enjoys a private benefit from developing a personal relationship with the executives. This may lead the owner to retain a senior executive in office even though a more productive replacement is available. The model shows that the private returns of the employment relationship distort executive selection, reducing the executives' average ability and the firm productivity. We estimate the structural parameters of the model using a panel of Italian firms with information on the nature of the controlling shareholder, matched with individual records of their executives. These estimates are used to quantify the relevance of private returns and the related productivity gap across firms characterized by four different types of ownership: government, family, conglomerate and foreign. We find that private returns are large in family and government controlled firms, while smaller with other ownership types. The resulting distortion in executive selection can account for TFP differentials between control types of about 10%. The structural estimates are fully consistent with a set of model-based OLS regressions, even though the sample moments used by the two approaches are different.

Keywords: corporate governance, private returns, TFP

JEL Classification: D2, G32, L2

Suggested Citation

Lippi, Francesco and Schivardi, Fabiano, Corporate Control and Executive Selection (September 2010). CEPR Discussion Paper No. DP8031. Available at SSRN: https://ssrn.com/abstract=1711044

Francesco Lippi (Contact Author)

University of Sassari ( email )

Piazza Universita
Sassari, 07100
Italy

Fabiano Schivardi

Einaudi Institute for Economics and Finance (EIEF) ( email )

Via Due Macelli, 73
Rome, 00187
Italy

Luiss Guido Carli - Department of Economics and Finance ( email )

Viale Romania 32
Rome, Rome 00187
Italy

Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research ( email )

Via Roentgen 1
Milan, 20136
Italy

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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