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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/27879
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| Title: | The Internal Governance of Firms |
| Authors: | Acharya, Viral
Myers, Stewart
Rajan, Raghuram |
| Issue Date: | 6-Feb-2009 |
| Series/Report no.: | FIN-08-033 |
| Abstract: | We develop a model of internal governance where the self-serving actions
of top management are limited by the potential reaction of subordinates.
We find that internal governance can mitigate agency problems and ensure
firms have substantial value, even without any external governance.
Internal governance seems to work best when both top management and
subordinates are important to value creation. We then allow for
governance provided by external financiers and find situations where
external governance, even if crude and uninformed, complements internal
governance in improving efficiency. Interestingly, this allows us to
develop a theory of dividend policy, where dividends are paid by
self-interested CEOs to maintain a balance between internal and external
control. Finally, we explore how the internal organization of firms may
be structured to enhance the role of internal governance. Our paper
could explain why young firms with limited external oversight, and firms
in countries with poor external governance, can have substantial value,
and why improving external governance may not be a panacea for all
governance problems. |
| URI: | http://hdl.handle.net/2451/27879 |
| Appears in Collections: | Finance Working Papers
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