Competition for Managers, Corporate Governance and Incentive Compensation
We propose a model in which better governance incentivizes managers to perform better and thus saves on the cost of providing pay for performance. However, when managerial talent is scarce, firms' competition to attract better managers reduces an individual firm's incentives to invest in corporate governance. In equilibrium, better managers end up at firms with weaker governance, and conversely, better-governed firms have lower-quality managers. Consistent with these implications, in a sample of US firms, we show that (i) better CEOs are matched to firms with weaker corporate governance and more so in industries with stronger competition for managers, and, (ii) corporate governance is more likely to change when there is CEO turnover, with governance weakening when the incoming CEO is better than the departing one.
|Date of creation:||Apr 2012|
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References listed on IDEAS
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- Anthony Marino & Jan Zabojnik, 2006.
"Work-Related Perks, Agency Problems, and Optimal Incentive Contracts,"
1107, Queen's University, Department of Economics.
- Anthony M. Marino & Ján Zábojník, 2008. "Work-related perks, agency problems, and optimal incentive contracts," RAND Journal of Economics, RAND Corporation, vol. 39(2), pages 565-585.
- Paul A. Gompers & Joy L. Ishii & Andrew Metrick, 2002.
"Corporate Governance and Equity Prices,"
Center for Financial Institutions Working Papers
02-32, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Marianne Bertrand & Sendhil Mullainathan, 2001. "Are CEOs Rewarded for Luck? The Ones Without Principals Are," The Quarterly Journal of Economics, Oxford University Press, vol. 116(3), pages 901-932.
- Raghuram Rajan & Julie Wulf, 2004.
"Are Perks Purely Managerial Excess?,"
NBER Working Papers
10494, National Bureau of Economic Research, Inc.
- Yermack, David, 1996. "Higher market valuation of companies with a small board of directors," Journal of Financial Economics, Elsevier, vol. 40(2), pages 185-211, February.
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