City Research Online

Abstract

When firms compete in the managerial labor market, the choice of corporate governance by a firm affects, and is affected by, the choice of governance by other firms. Firms with weaker governance offer managers more generous incentive compensation, which induces firms with good governance to also overpay their management. Due to this externality, overall level of governance in the economy can be inefficiently low. Poor governance can in fact be employed by incumbent firms to deter entry by new firms. Such corporate governance externalities have important implications for regulatory standards, ownership structure of firms, and the market for corporate control.

Publication Type:	Article
Additional Information:	This is a pre-copyedited, author-produced PDF of an article accepted for publication in Review of Finance following peer review. The version of record Acharya, VV & Volpin, PF (2010). Corporate Governance Externalities. Review of Finance, 14(1) p1-33, is available online at: http://dx.doi.org/10.1093/rof/rfp002
Publisher Keywords:	executive compensation, externality, entry, regulation, governance standards, ownership structure, private equity, hedge funds, shareholder activism
Subjects:	H Social Sciences > HG Finance
Departments:	Bayes Business School > Finance
SWORD Depositor:	Symplectic Administrator

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