Working Paper: CEPR ID: DP8936
Authors: Viral V. Acharya; Marc Gabarro; Paolo Volpin
Abstract: We propose a model in which better governance incentivizes managers to perform better and thus saves on the cost of providing pay for performance. However, when managerial talent is scarce, firms' competition to attract better managers reduces an individual firm's incentives to invest in corporate governance. In equilibrium, better managers end up at firms with weaker governance, and conversely, better-governed firms have lower-quality managers. Consistent with these implications, in a sample of US firms, we show that (i) better CEOs are matched to firms with weaker corporate governance and more so in industries with stronger competition for managers, and, (ii) corporate governance is more likely to change when there is CEO turnover, with governance weakening when the incoming CEO is better than the departing one.
Keywords: corporate governance; competition for managers; CEO duality
JEL Codes: G3; G38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Choice of duality (C25) | Quality of CEO hired (M12) |
| CEO ability (M12) | Choice of duality (C25) |
| Competition for managerial talent strengthens correlation between duality and CEO ability (D29) | Correlation between duality and CEO ability (D29) |
| CEO turnover (M12) | Changes in duality (C69) |