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Corporate Control and Executive Selection

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  • F. Lippi

    ()

  • F. Schivardi

    ()

Abstract

We present a model in which the owner of the firm enjoys a private benefit from developing a personal relationship with the executives. This may lead the owner to retain a senior executive in office even though a more productive replacement is available. The model shows that the private returns of the employment relationship distort executive selection, reducing the executives’ average ability and the firm productivity. We estimate the structural parameters of the model using a panel of Italian firms with information on the nature of the controlling shareholder, matched with individual records of their executives. These estimates are used to quantify the relevance of private returns and the related productivity gap across firms characterized by four different types of ownership - government, family, conglomerate and foreign. We find that private returns are large in family and government controlled firms, while smaller with other ownership types. The resulting distortion in executive selection can account for TFP differentials between control types of about 10%. The structural estimates are fully consistent with a set of model-based OLS regressions, even though the sample moments used by the two approaches are different.

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Bibliographic Info

Paper provided by Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia in its series Working Paper CRENoS with number 201021.

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Date of creation: 2010
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Handle: RePEc:cns:cnscwp:201021

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Keywords: corporate governance; private returns; tfp;

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References

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  1. Claudio Michelacci & Fabiano Schivardi, 2010. "Does Idiosyncratic Business Risk Matter?," Working Papers CELEG, Dipartimento di Economia e Finanza, LUISS Guido Carli 1002, Dipartimento di Economia e Finanza, LUISS Guido Carli.
  2. Bandiera, Oriana & Guiso, Luigi & Prat, Andrea & Sadun, Raffaella, 2009. "Matching Firms, Managers, and Incentives," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7207, C.E.P.R. Discussion Papers.
  3. Landier, Augustin & Sraer, David & Thesmar, David, 2006. "Bottom-Up Corporate Governance," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5500, C.E.P.R. Discussion Papers.
  4. Susana Iranzo & Fabiano Schivardi & Elisa Tosetti, 2008. "Skill Dispersion and Firm Productivity: An Analysis with Employer-Employee Matched Data," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 26(2), pages 247-285, 04.
  5. Xavier Gabaix & Augustin Landier, 2006. "Why Has CEO Pay Increased So Much?," NBER Working Papers 12365, National Bureau of Economic Research, Inc.
  6. Federico Cingano & Fabiano Schivardi, 2003. "Identifying the Sources of Local Productivity Growth," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 474, Bank of Italy, Economic Research and International Relations Area.
  7. Nicholas Bloom & Christos Genakos & Raffaella Sadun & John Van Reenen, 2011. "Management Practices Across Firms and Countries," CEP Discussion Papers, Centre for Economic Performance, LSE dp1109, Centre for Economic Performance, LSE.
  8. George-Levi Gayle & Limor Golan & Robert A. Miller, . "Promotion, Turover and Compensation in the Executive Market," GSIA Working Papers, Carnegie Mellon University, Tepper School of Business 2008-E32, Carnegie Mellon University, Tepper School of Business.
  9. Marko Tervio, 2008. "The Difference That CEOs Make: An Assignment Model Approach," American Economic Review, American Economic Association, American Economic Association, vol. 98(3), pages 642-68, June.
  10. Fernando Alvarez & Francesco Lippi, 2007. "Financial Innovation and the Transactions Demand for Cash," EIEF Working Papers Series, Einaudi Institute for Economics and Finance (EIEF) 0807, Einaudi Institute for Economics and Finance (EIEF), revised Sep 2007.
  11. Oriana Bandiera & Iwan Barankay & Imran Rasul, 2009. "Social Connections and Incentives in the Workplace: Evidence From Personnel Data," Econometrica, Econometric Society, Econometric Society, vol. 77(4), pages 1047-1094, 07.
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Cited by:
  1. Oriana Bandiera & Luigi Guiso & Andrea Prat & Raffaella Sadun, 2009. "Matching Firms, Managers, and Incentives," EIEF Working Papers Series, Einaudi Institute for Economics and Finance (EIEF) 0901, Einaudi Institute for Economics and Finance (EIEF), revised Feb 2009.
  2. Andrea Pozzi & Fabiano Schivardi, 2012. "Demand or productivity: What determines firm growth?," EIEF Working Papers Series, Einaudi Institute for Economics and Finance (EIEF) 1211, Einaudi Institute for Economics and Finance (EIEF), revised Oct 2012.

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