I provide empirical evidence that badly governed firms respond more to aggregate shocks than do well governed firms. I build a simple model where managers are prone to over-invest and where shareholders are more willing to tolerate such a behavior in good times. The model successfully explains the average profit differences as well as the cyclical behavior of sales, employment and investment for firms with different governance qualities. The quantitative results suggest that governance conflicts can explain 30% of aggregate volatility
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Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number
114.
Length: Date of creation: 2004 Date of revision: Handle: RePEc:red:sed004:114
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Find related papers by JEL classification: E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles G3 - Financial Economics - - Corporate Finance and Governance
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