Competition, Managerial Slack, and Corporate Governance
44 Pages Posted: 22 Mar 2011 Last revised: 22 Oct 2014
Date Written: October 20, 2014
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: Suggested Citation