Irrelevance of Governance Structure

69 Pages Posted: 12 Mar 2019 Last revised: 28 May 2019

See all articles by Zohar Goshen

Zohar Goshen

Columbia University - Law School; Ono Academic College Faculty of Law

Doron Levit

University of Pennsylvania - Finance Department; European Corporate Governance Institute (ECGI)

Date Written: February 24, 2019


We developed a model under which the allocation of control rights between shareholders and managers (“governance structure”) is irrelevant to firm value. In our model, governance structures affect managers’ incentive to invest, as strong governance tightens managerial freedom and weak governance loosens it. Given their respective managerial freedom, multiple firms buy resources for their business activities in a competitive market. Managers differ in their integrity, and given their type, can preserve value, create value, or destroy value and consume private benefits. Shareholders deduce from decisions made by managers whether a manager should be retained or fired.

The model shows that independent governance choices of individual firms are interrelated through the feedback from resources markets. In a competitive equilibrium, which is socially efficient, the universe of firms splits between strong and weak governance firms, with all of them having the same value. No firm can change its value by changing from weak to strong governance or vice versa; the governance structure is irrelevant.

The irrelevance result has important implications for the study of corporate governance.
First, it allows us to explore which relaxed assumptions break the irrelevance result. Second, since shareholders with market power violate the irrelevance conditions, the model provides insights into the consequences of common ownership. It shows that, by pushing more public firms toward strong governance, institutional investors with common ownership create a monopsony power, with negative consequences to the labor market, the inputs market, the investment level in the economy, and the number of firms traded on public markets. Third, the model illuminates the need for empirical studies to specify the conditions under which strong governance is assumed to consistently be better than weak governance.

Keywords: Corporate Governance, Common Ownership, Market Power, Shareholder Rights, Control Rights, Agency Costs, Principal Costs

JEL Classification: D20, D21, D23, D24, D61, D74, D83, D86, G23, G30, G32, G34, K22, L12, L40

Suggested Citation

Goshen, Zohar and Levit, Doron, Irrelevance of Governance Structure (February 24, 2019). Columbia Law and Economics Working Paper No. 603; European Corporate Governance Institute (ECGI) - Finance Working Paper No. 606/2019. Available at SSRN: or

Zohar Goshen (Contact Author)

Columbia University - Law School ( email )

435 West 116th Street
New York, NY 10025
United States
212-854-9760 (Phone)
212-854-7946 (Fax)

Ono Academic College Faculty of Law

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Kiryat Ono, 55000


Doron Levit

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

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