Working Paper: NBER ID: w15568
Authors: Viral V. Acharya; Stewart C. Myers; Raghuram Rajan
Abstract: We develop a model of internal governance where the self-serving actions of top management are limited by the potential reaction of subordinates. Internal governance can mitigate agency problems and ensure that firms have substantial value, even with little or no external governance by investors. External governance, even if crude and uninformed, can complement internal governance and improve efficiency. This leads to a theory of investment and dividend policy, where dividends are paid by self-interested CEOs to maintain a balance between internal and external control.
Keywords: internal governance; agency problems; CEO behavior; subordinate managers; corporate governance
JEL Codes: G31; G34; G35
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| internal governance (G38) | mitigate agency problems (G34) |
| internal governance (G38) | enhance firm value (G32) |
| subordinate managers' reactions (M54) | CEO's short-term actions (M12) |
| CEO's short-term actions (M12) | overall firm performance (L25) |
| external governance (G38) | complement internal governance (G38) |
| CEO's investment decisions (G11) | expected future actions of the manager (D84) |
| combination of internal governance and external governance (G38) | improvements in firm efficiency (D21) |