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Is managerial entrenchment always bad? A CSR approach

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  • Jordi Surroca

    ()

  • Josep A. Tribó

    ()

Abstract

In this paper, we argue that managerial entrenchment may be positive when there is excessive external pressure from financial markets. In these situations, managers have more freedom to implement value-enhancing strategies, such those related to corporate social responsibility (CSR) activities. This is a good-type of entrenchment. On the other hand, when the external pressure is not so high, given that the pressure is from inside the firm, managerial entrenchment is bad and the use of CSR investments may exacerbate the agency problem. We prove this claim in an empirical study conducted of 279 international firms that operate in 22 different countries for the period 2002-2005. These firms participate in two different institutional contexts: that of the Anglo-Saxon countries, where the pressure of financial markets is intensive, or that of the Continental European countries in which the corporate control mechanisms are mainly internal.

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Paper provided by Universidad Carlos III, Instituto sobre Desarrollo Empresarial "Carmen Vidal Ballester" in its series Business Economics Working Papers with number id-09-01.

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Date of creation: 2009
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Handle: RePEc:cte:idrepe:id-09-01

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  1. McConnell, John J. & Servaes, Henri, 1990. "Additional evidence on equity ownership and corporate value," Journal of Financial Economics, Elsevier, Elsevier, vol. 27(2), pages 595-612, October.
  2. Fudenberg, Drew & Tirole, Jean, 1995. "A Theory of Income and Dividend Smoothing Based on Incumbency Rents," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 103(1), pages 75-93, February.
  3. Cespa, Giovanni & Cestone, Giacinta, 2004. "Corporate Social Responsibility and Managerial Entrenchment," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4648, C.E.P.R. Discussion Papers.
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  6. Kothari, S.P. & Leone, Andrew J. & Wasley, Charles E., 2005. "Performance matched discretionary accrual measures," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 39(1), pages 163-197, February.
  7. Shleifer, Andrei & Vishny, Robert W, 1986. "Large Shareholders and Corporate Control," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 94(3), pages 461-88, June.
  8. Demsetz, Harold & Villalonga, Belen, 2001. "Ownership structure and corporate performance," Journal of Corporate Finance, Elsevier, Elsevier, vol. 7(3), pages 209-233, September.
  9. Denis, David J. & Denis, Diane K. & Sarin, Atulya, 1997. "Ownership structure and top executive turnover," Journal of Financial Economics, Elsevier, Elsevier, vol. 45(2), pages 193-221, August.
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