A Framework for Assessing Corporate Governance Reform

22 Pages Posted: 5 May 2006  

Benjamin E. Hermalin

University of California, Berkeley

Michael S. Weisbach

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: February 2006

Abstract

In light of recent corporate scandals, numerous proposals have been introduced for reforming corporate governance. This paper provides a theoretical framework through which to evaluate these reforms. Unlike various ad hoc arguments, this framework recognizes that governance structures arise endogenously in response to the constrained optimization problems faced by the relevant parties. Contract theory provides a set of necessary conditions under which governance reform can be welfare-improving: 1) There is asymmetric information at the time of contracting; or 2) Governance failures impose externalities on third parties; or 3) The state has access to remedies or punishments that are not available to third parties. We provide a series of models that illustrate the importance of these conditions and what can go wrong if they are not met.

Suggested Citation

Hermalin, Benjamin E. and Weisbach, Michael S., A Framework for Assessing Corporate Governance Reform (February 2006). NBER Working Paper No. w12050. Available at SSRN: https://ssrn.com/abstract=885647

Benjamin E. Hermalin

University of California, Berkeley ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
510-642-7575 (Phone)
510-643-1420 (Fax)

Michael S. Weisbach (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Paper statistics

Downloads
59
Rank
14,386
Abstract Views
777