Information Externalities in Corporate Governance

32 Pages Posted: 19 Oct 2011 Last revised: 31 Dec 2011

See all articles by Konrad Raff

Konrad Raff

Norwegian School of Economics (NHH)

Date Written: December 20, 2011


This paper studies the interactions between monitoring choices in different firms. Shareholders gather information about a common industry shock and subsequently intervene with management. An information externality arises because intervention transmits information about industry conditions to shareholders in competing firms. Closer monitoring in one firm improves the performance of industry peers. In equilibrium, all firms free-ride and there is underprovision of monitoring. A regulatory cap on CEO compensation can increase investor welfare. Disclosure of shareholder intervention is socially valuable and inefficiently low in equilibrium. Using U.S. data on forced CEO turnover, I provide empirical evidence of information spillovers across firms. Controlling for various performance measures, I find that CEOs who perform intermediately are significantly more likely to be dismissed after other CEOs in their industry have been fired. At the same time, CEOs’ turnover risk is not related to firings outside of their industry. The predictive power of peer decisions for turnover risk is significantly stronger for firms with low institutional blockholder ownership.

Keywords: Corporate Governance, Monitoring, Externality, CEO Turnover, Regulation, CEO Pay

JEL Classification: G30, G34

Suggested Citation

Raff, Konrad, Information Externalities in Corporate Governance (December 20, 2011). AFA 2012 Chicago Meetings Paper, Available at SSRN: or

Konrad Raff (Contact Author)

Norwegian School of Economics (NHH) ( email )

Department of Finance
Helleveien 30
Bergen, 5045


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