Working Paper: NBER ID: w23121
Authors: Benjamin Hermalin; Michael Weisbach
Abstract: A manager’s current and potential future employers are continually assessing her or his ability. Such assessment is a crucial component of corporate governance and this chapter provides an overview of the research on that aspect of governance. In particular, we review how assessment generates incentives (both good and bad), generates risks that must be faced by both managers and firms, and affects the contractual relationships between those parties in important ways. Assessment (or learning) proves a key perspective from which to study, evaluate, and possibly even regulate corporate governance. Moreover, because learning is a behavior notoriously subject to systematic biases, this perspective is a natural avenue through which to introduce behavioral and psychological insights into the study of corporate governance.
Keywords: Managerial Ability; Corporate Governance; Assessment; Incentives
JEL Codes: D81; D83; G34; M12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Assessment of a manager's ability (M54) | Corporate governance (G38) |
| Assessment of a manager's ability (M54) | Managerial behavior and decision-making processes (D91) |
| Observation of performance (C90) | Managerial behavior (D22) |
| Managerial behavior (D22) | Signal jamming (L96) |
| Accuracy of assessments (C52) | Risk managers face (G22) |
| Risk managers face (G22) | Compensation demands (J33) |
| Assessment of a manager's ability (M54) | Retention or dismissal decisions (J63) |
| Firm performance outcomes (L25) | Retention or dismissal decisions (J63) |