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The Internal Governance of Firms

  • Viral V. Acharya
  • Stewart C. Myers
  • Raghuram Rajan

We develop a model of internal governance where the self-serving actions of top management are limited by the potential reaction of subordinates. Internal governance can mitigate agency problems and ensure that firms have substantial value, even with little or no external governance by investors. External governance, even if crude and uninformed, can complement internal governance and improve efficiency. This leads to a theory of investment and dividend policy, where dividends are paid by self-interested CEOs to maintain a balance between internal and external control.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15568.

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Date of creation: Dec 2009
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Publication status: published as Viral V. Acharya & Stewart C. Myers & Raghuram G. Rajan, 2011. "The Internal Governance of Firms," Journal of Finance, American Finance Association, vol. 66(3), pages 689-720, 06.
Handle: RePEc:nbr:nberwo:15568
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