Towards a New Theory of Corporate Governance: Objectivity Versus Proximity

35 Pages Posted: 21 Mar 2005

See all articles by Arnoud W. A. Boot

Arnoud W. A. Boot

University of Amsterdam - Amsterdam Business School; Centre for Economic Policy Research (CEPR); Tinbergen Institute

Jonathan R. Macey

Yale Law School

Anjolein Schmeits

New York University (NYU) - Leonard N. Stern School of Business; New York University (NYU) - Department of Finance

Date Written: February 21, 2005

Abstract

In this paper we identify the tradeoffs between objectivity and proximity as fundamental to the corporate governance debate. We stress the value of objectivity that comes with distance (e.g., the market-oriented U.S. system), and the value of better information that comes with proximity (e.g., the more intrusive Continental European model). Our key result is that the optimal arrangement between management and monitor (board or shareholders) should either capitalize on the better information that comes with proximity or seek to optimally exploit the objectivity that comes with distance. We argue that the asset structure, in particular, the irreversibility of investments, and the opportunity costs associated with resource misallocation critically determine the optimality of the distance- or proximity-based arrangement. We also discuss the ways in which investors have contracted around the flaws in their own corporate governance systems, pointing at the adaptibility of different arrangements.

Keywords: Corporate governance, monitoring, asset structure

Suggested Citation

Boot, Arnoud W. A. and Macey, Jonathan R. and Schmeits, Anjolein B., Towards a New Theory of Corporate Governance: Objectivity Versus Proximity (February 21, 2005). Available at SSRN: https://ssrn.com/abstract=686770 or http://dx.doi.org/10.2139/ssrn.686770

Arnoud W. A. Boot (Contact Author)

University of Amsterdam - Amsterdam Business School ( email )

Roetersstraat 11
Amsterdam, 1018 WB
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Centre for Economic Policy Research (CEPR) ( email )

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Tinbergen Institute ( email )

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Jonathan R. Macey

Yale Law School ( email )

P.O. Box 208215
New Haven, CT 06520-8215
United States
+203-432-7913 (Phone)
+203-4871 (Fax)

Anjolein B. Schmeits

New York University (NYU) - Leonard N. Stern School of Business ( email )

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Suite 9-160
New York, NY NY 10012
United States

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

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