Competition, Managerial Slack, and Corporate Governance

44 Pages Posted: 22 Mar 2011 Last revised: 22 Oct 2014

See all articles by Limor Golan

Limor Golan

Washington University in St. Louis, Department of Economics; Federal Reserve Banks - Federal Reserve Bank of St. Louis

Christine A. Parlour

University of California, Berkeley - Finance Group

Uday Rajan

Stephen M. Ross School of Business, University of Michigan

Date Written: October 20, 2014

Abstract

We model the interaction between product market competition and internal governance at firms. Competition makes it more difficult to infer a manager's action given the realized output, thus increasing the cost of inducing effort. An exogenous change in the incentive to shirk increases managerial slack. However, the effects on firm value are ambiguous; in particular, firm value can increase as slack increases. As a result, empirical tests that focus on changes in value may not capture changes in the level of slack. We also provide conditions under which increased competition leads all firms to switch from high to low effort.

Keywords: Managerial Slack, Competition, Agency Cost

JEL Classification: G30, L13, G34

Suggested Citation

Golan, Limor and Parlour, Christine A. and Rajan, Uday, Competition, Managerial Slack, and Corporate Governance (October 20, 2014). Available at SSRN: https://ssrn.com/abstract=1787061 or http://dx.doi.org/10.2139/ssrn.1787061

Limor Golan

Washington University in St. Louis, Department of Economics ( email )

Campus Box 1120
Saint Louis, MO 63130
United States

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

P.O. Box 442
St. Louis, MO 63166-0442
United States

Christine A. Parlour

University of California, Berkeley - Finance Group ( email )

Haas School of Business
545 Student Services Building
Berkeley, CA 94720
United States
510-643-9391 (Phone)

Uday Rajan (Contact Author)

Stephen M. Ross School of Business, University of Michigan ( email )

701 Tappan Street
Ann Arbor, MI 48109
United States
734-764-2310 (Phone)

HOME PAGE: http://webuser.bus.umich.edu/urajan

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