The Adoption of a Code of Best Practice: Incentive Implications
AbstractWe 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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Bibliographic InfoPaper provided by Universidad Pablo de Olavide, Department of Economics in its series Working Papers with number 07.18.
Length: 34 pages
Date of creation: Dec 2007
Date of revision:
Codes of Best Practice; Corporate Governance; Agency model; Limited Liability;
Find related papers by JEL classification:
- G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
- D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
- L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General
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