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Optimal Delegation when the Large Shareholder has Multiple Tasks

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  • Clara Graziano
  • Annalisa Luporini

Abstract

We analyze the optimal ownership, delegation and compensation structures when a manager is hired to run a firm and to gather information on investment projects. The initial owner has two tasks: monitoring the manager and supervising project choice. Optimality would require a large ownership stake for monitoring but a small stake for not interfering with managerial incentives. Delegating project choice to the manager can alleviate this conflict if managerial private benefits are not too small. The large shareholder retains full ownership of the firm but monitoring, and the resulting firing policy, are distorted. Severance pay plays a key role in the optimal compensation scheme. Delegation is interpreted as a dual-board structure.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2010/wp-cesifo-2010-04/cesifo1_wp3028.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3028.

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Date of creation: 2010
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Handle: RePEc:ces:ceswps:_3028

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Keywords: large shareholder; delegation; monitoring; board of directors; corporate governance;

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References

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  1. Renee B. Adams & Benjamin E. Hermalin & Michael S. Weisbach, 2010. "The Role of Boards of Directors in Corporate Governance: A Conceptual Framework and Survey," Journal of Economic Literature, American Economic Association, vol. 48(1), pages 58-107, March.
  2. Tirole, Jean, 2001. "Corporate Governance," Econometrica, Econometric Society, Econometric Society, vol. 69(1), pages 1-35, January.
  3. Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer, 1998. "Corporate Ownership Around the World," NBER Working Papers 6625, National Bureau of Economic Research, Inc.
  4. Yermack, David, 2006. "Golden handshakes: Separation pay for retired and dismissed CEOs," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 41(3), pages 237-256, September.
  5. Benjamin E. Hermalin & Michael S. Weisbach, 1996. "Endogenously Chosen Boards of Directors and Their Monitoring of the CEO," Working Papers _004, University of California at Berkeley, Haas School of Business.
  6. Silvia Dominguez-Martinez & Otto H. Swank & Bauke Visser, 2008. "In Defense of Boards," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 17(3), pages 667-682, 09.
  7. Andres Almazan & Javier Suarez, 2003. "Entrenchment and Severance Pay in Optimal Governance Structures," Journal of Finance, American Finance Association, American Finance Association, vol. 58(2), pages 519-548, 04.
  8. Andrei Shleifer & Robert W. Vishny, 1996. "A Survey of Corporate Governance," NBER Working Papers 5554, National Bureau of Economic Research, Inc.
  9. Milton Harris & Artur Raviv, 2008. "A Theory of Board Control and Size," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 21(4), pages 1797-1832, July.
  10. Benjamin E. Hermalin & Michael S. Weisbach, 2001. "Boards of Directors as an Endogenously Determined Institution: A Survey of the Economic Literature," NBER Working Papers 8161, National Bureau of Economic Research, Inc.
  11. Clara Graziano & Annalisa Luporini, 2003. "Board Efficiency and Internal Corporate Control Mechanisms," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 12(4), pages 495-530, December.
  12. Raheja, Charu G., 2005. "Determinants of Board Size and Composition: A Theory of Corporate Boards," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 40(02), pages 283-306, June.
  13. Faccio, Mara & Lang, Larry H. P., 2002. "The ultimate ownership of Western European corporations," Journal of Financial Economics, Elsevier, Elsevier, vol. 65(3), pages 365-395, September.
  14. Burkart, Mike & Gromb, Denis & Panunzi, Fausto, 1997. "Large Shareholders, Monitoring, and the Value of the Firm," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 112(3), pages 693-728, August.
  15. Renée B. Adams & Daniel Ferreira, 2007. "A Theory of Friendly Boards," Journal of Finance, American Finance Association, American Finance Association, vol. 62(1), pages 217-250, 02.
  16. Benjamin E. Hermalin, 2005. "Trends in Corporate Governance," Journal of Finance, American Finance Association, American Finance Association, vol. 60(5), pages 2351-2384, October.
  17. David Hirshleifer & Anjan V. Thakor, 1998. "Corporate Control Through Board Dismissals and Takeovers," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 7(4), pages 489-520, December.
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Cited by:
  1. Clara Graziano & Annalisa Luporini, 2005. "Ownership Concentration, Monitoring and Optimal Board Structure," Working Papers, Fondazione Eni Enrico Mattei 2005.14, Fondazione Eni Enrico Mattei.

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