The Separation of Firm Ownership and Management: A Reputational Perspective
50 Pages Posted: 31 Oct 2013 Last revised: 11 Mar 2015
Date Written: March 2015
We examine the effect of ownership and governance structures on what is arguably a firm’s most valuable asset: its reputation. We model reputations based on alterable organizational and structural firm characteristics rather than the personal characteristics of the management team. We show that, in some cases, delegated “professional” management combined with outside shareholder governance supports reputable firm behavior even when owner management cannot. The option to reform after a reputation is damaged further increases the advantage of delegated management because the reform option reduces the ability of owner managers to commit ex ante to reputable behavior.
Keywords: adverse selection, reputation
JEL Classification: C91, D82, G31, G32, L15
Suggested Citation: Suggested Citation