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Irrational executives and corporate governance

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  • Abe De Jong

Abstract

The top managers of companies have a great influence on the investment and financing policies of the companies that they lead. According to the economic principal-agent theory, rational managers look after their own interests, even if this is at the cost of shareholders and other stakeholders. Literature on corporate governance describes the workings and effectiveness of mechanisms to constrain these agency problems. However, recent studies on behavioural corporate finance show that managers do not always act rationally and that this irrationality can have a quantifiable negative value impact in strategic decisions. The central question to this paper is this: what influence can corporate governance have in reducing the negative effects of irrational behaviour in managers?

Suggested Citation

  • Abe De Jong, 2009. "Irrational executives and corporate governance," International Journal of Corporate Governance, Inderscience Enterprises Ltd, vol. 1(3), pages 285-297.
    • Handle: RePEc:ids:ijcgov:v:1:y:2009:i:3:p:285-297
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