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Corporate Control and Executive Selection

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  • Francesco Lippi

    (University of Sassari and EIEF)

  • Fabiano Schivardi

    (University of Cagliari and EIEF)

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 Einaudi Institute for Economics and Finance (EIEF) in its series EIEF Working Papers Series with number 1014.

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Length: 48 pages
Date of creation: 2010
Date of revision: Jul 2010
Handle: RePEc:eie:wpaper:1014

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  1. Federico Cingano & Fabiano Schivardi, 2003. "Identifying the Sources of Local Productivity Growth," Temi di discussione (Economic working papers) 474, Bank of Italy, Economic Research and International Relations Area.
  2. Xavier Gabaix & Augustin Landier, 2006. "Why Has CEO Pay Increased So Much?," 2006 Meeting Papers 518, Society for Economic Dynamics.
  3. Bandiera, Oriana & Barankay, Iwan & Rasul, Imran, 2008. "Social Connections and Incentives in the Workplace: Evidence from Personnel Data," IZA Discussion Papers 3917, Institute for the Study of Labor (IZA).
  4. George-Levi Gayle & Limor Golan & Robert A. Miller, . "Promotion, Turover and Compensation in the Executive Market," GSIA Working Papers 2008-E32, Carnegie Mellon University, Tepper School of Business.
  5. Oriana Bandiera & Luigi Guiso & Andrea Prat & Raffaella Sadun, 2009. "Matching Firms, Managers and Incentives," Economics Working Papers ECO2009/14, European University Institute.
  6. Augustin Landier & Julien Sauvagnat & David Sraer & David Thesmar, 2013. "Bottom-Up Corporate Governance," Review of Finance, European Finance Association, vol. 17(1), pages 161-201.
  7. Alvarez, Fernando E & Lippi, Francesco, 2007. "Financial Innovation and the Transactions Demand for Cash," CEPR Discussion Papers 6472, C.E.P.R. Discussion Papers.
  8. Iranzo, Susana & Schivardi, Fabiano & Tosetti, Elisa, 2006. "Skill Dispersion and Firm Productivity: An Analysis with Employer-Employee Matched Data," CEPR Discussion Papers 5539, C.E.P.R. Discussion Papers.
  9. claudio Michelacci & Fabiano Schivardi, 2008. "Does Idiosyncratic Business Risk Matter?," EIEF Working Papers Series 0813, Einaudi Institute for Economics and Finance (EIEF), revised Jul 2008.
  10. Nicholas Bloom & Christos Genakos & Raffaella Sadun & John Van Reenen, 2012. "Management Practices Across Firms and Countries," NBER Working Papers 17850, National Bureau of Economic Research, Inc.
  11. Marko Tervio, 2008. "The Difference That CEOs Make: An Assignment Model Approach," American Economic Review, American Economic Association, vol. 98(3), pages 642-68, June.
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Cited by:
  1. Bandiera, Oriana & Guiso, Luigi & Prat, Andrea & Sadun, Raffaella, 2009. "Matching Firms, Managers, and Incentives," CEPR Discussion Papers 7207, C.E.P.R. Discussion Papers.
  2. Andrea Pozzi & Fabiano Schivardi, 2012. "Demand or Productivity: What Determines Firm Growth?," Development Working Papers 344, Centro Studi Luca d\'Agliano, University of Milano, revised 13 Nov 2012.

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