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Codes of Best Practice in competitive markets for managers

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  • Eduard Alonso-Paulí

    ()

  • David Pérez-Castrillo

    ()

Abstract

We study firms' corporate governance in environments where possibly heterogeneous shareholders compete for possibly heterogeneous managers. A firm, formed by a shareholder and a manager, can sign either an incentive contract or a contract including a Code of Best Practice. A Code allows for a better manager's control but makes manager's decisions hard to react when market conditions change. It tends to be adopted in markets with low volatility and in low-competitive environments. The firms with the best projects tend to adopt the Code when managers are not too heterogeneous while the best managers tend to be hired through incentive contracts when the projects are similar. Although the matching between shareholders and managers is often positively assortative, the shareholders with the best projects might be willing to renounce to hire the best managers, signing contracts including Codes with lower-ability managers.

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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 49 (2012)
Issue (Month): 1 (January)
Pages: 113-141

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Handle: RePEc:spr:joecth:v:49:y:2012:i:1:p:113-141

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Related research

Keywords: Corporate governance; Incentives; Moral hazard; Matching model; Sharpe ratio; G34; D82;

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References

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Citations

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Cited by:
  1. Albert Banal-Estañol & Inés Macho-Stadler & David Pérez-Castrillo, 2013. "Endogeneous matching in university-industry collaboration: Theory and empirical evidence from the UK," Economics Working Papers 1379, Department of Economics and Business, Universitat Pompeu Fabra.
  2. repec:cge:warwcg:119 is not listed on IDEAS
  3. Ghatak, Maitreesh & Karaivanov, Alexander, 2013. "Contractual Structure in Agriculture with Endogenous Matching," CAGE Online Working Paper Series 120, Competitive Advantage in the Global Economy (CAGE).

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