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On the Efficiency of Internal and External Corporate Control Mechanisms

In: The Management of Corporate Acquisitions

Author

Listed:
  • James P. Walsh
  • James K. Seward

Abstract

Managers of contemporary publicly held organisations typically are not the owners. Rather, a specialisation of responsibilities has evolved whereby managers coordinate activities within the firm and position it appropriately in its competitive environment; the owners of the firm bear financial risk in the hope of retaining the difference between the firm’s productive cash-flows and the outflows of its promised payments (Fama and Jensen 1983a, 1983b). As the firm’s owners would suffer tremendous financial losses if the firm failed, they tend to diversify their holdings across a variety of firms as a hedge against such a possibility. As a result, the individual owner has little interest in conducting, or even closely monitoring, the day-to-day activities in all of the firms in which he or she has a financial interest (Fama 1980). The owners hire boards of directors who, in turn, hire managers to perform these duties.

Suggested Citation

  • James P. Walsh & James K. Seward, 1994. "On the Efficiency of Internal and External Corporate Control Mechanisms," Palgrave Macmillan Books, in: Georg Krogh & Alessandro Sinatra & Harbir Singh (ed.), The Management of Corporate Acquisitions, chapter 9, pages 191-247, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-349-13016-0_9
    DOI: 10.1007/978-1-349-13016-0_9
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