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The Adoption of a Code of Best Practice: Incentive Implications

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  • Eduard Alonso-Paulí

    ()
    (Department of Economics, Universidad Pablo de Olavide)

Abstract

We study the incentives induced by the adoption of a Code of Best Practice. Using an agency model, we analyze whether and when firms are interested in adopting a Code that allows the shareholder to reduce the manager's discretion. Our results suggest that if a voluntary Code is available, not all firms will be interested in it. In firms that do adopt it, the Code is not always used to reach more efficient outcomes. Regarding investment decisions, we show that a proper design of a Code can alleviate the distortions caused by the agency problem at the investment level. Finally, we analyze some features that a regulator protecting shareholder's wealth should consider. Our findings suggest that heterogeneity in Codes may be partially explained by differences in the distribution of firms or by different abilities of the regulator.

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File URL: http://www.upo.es/serv/bib/wps/econ0718.pdf
File Function: First version, 2007
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Bibliographic Info

Paper provided by Universidad Pablo de Olavide, Department of Economics in its series Working Papers with number 07.18.

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Length: 34 pages
Date of creation: Dec 2007
Date of revision:
Handle: RePEc:pab:wpaper:07.18

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Keywords: Codes of Best Practice; Corporate Governance; Agency model; Limited Liability;

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  1. Park, Eun-Soo, 1995. "Incentive Contracting under Limited Liability," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 4(3), pages 477-90, Fall.
  2. Steven Young, 2000. "The Increasing Use of Non-Executive Directors: Its Impact on UK Board Structure and Governance Arrangements," Journal of Business Finance & Accounting, Wiley Blackwell, Wiley Blackwell, vol. 27(9&10), pages 1311-1342.
  3. Fama, Eugene F & Jensen, Michael C, 1983. "Separation of Ownership and Control," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 26(2), pages 301-25, June.
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  6. Murphy, Kevin J., 1999. "Executive compensation," Handbook of Labor Economics, Elsevier, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 38, pages 2485-2563 Elsevier.
  7. Andrei Shleifer & Robert W. Vishny, 1995. "A Survey of Corporate Governance," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 1741, Harvard - Institute of Economic Research.
  8. Elisabeth Dedman, 2000. "An Investigation into the Determinants of UK Board Structure Before and After Cadbury," Corporate Governance: An International Review, Wiley Blackwell, Wiley Blackwell, vol. 8(2), pages 133-153, 04.
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Cited by:
  1. Eduard Alonso-Paulí & David Pérez-Castrillo, 2008. "Codes of Best Practice in Competitive Markets for Managers," UFAE and IAE Working Papers, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC) 726.08, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).

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