The Separation of Decision Making and Risk Bearing: Organizational Form and the Decision to Go Private

IFA Working Paper 186

Posted: 16 Sep 1999

See all articles by Ernst G. Maug

Ernst G. Maug

University of Mannheim Business School; European Corporate Governance Institute (ECGI)

Date Written: February 7, 1994

Abstract

The paper investigates the hypothesis that the separation of ownership and control is made viable by an organizational structure that separates decision making from monitoring. The paper analyses the choice of organizational form and contrasts a hierarchy where executive management is monitored and remunerated by a director who acts as a supervisory agent, and an entrepreneurial firm in which all control rights are concentrated in the hands of a single agent. It is shown how the organizational form affects the allocation and the tradeoff between risk-sharing and incentives. The model predicts that the hierarchy is a dominant choice in environments where monitoring information is precise, whereas the entrepreneurial firm is a better choice if productive efforts are difficult to monitor. Also, more efficient hierarchies have a lower correlation between shareholder value and managerial compensation. The paper shed some light on the decision to go private and on the reverse-LBO phenomenon.

JEL Classification: G30, G34

Suggested Citation

Maug, Ernst G., The Separation of Decision Making and Risk Bearing: Organizational Form and the Decision to Go Private (February 7, 1994). IFA Working Paper 186. Available at SSRN: https://ssrn.com/abstract=5422

Ernst G. Maug (Contact Author)

University of Mannheim Business School ( email )

L9, 1-2
Mannheim, 68131
Germany
+49 621 181-1952 (Phone)

HOME PAGE: http://cf.bwl.uni-mannheim.de/de/people/maug/

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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