The Internal Governance of Firms

By V. Acharya, Stewart C. Myers, Raghuram G. Rajan. 2009

329 citations recorded by the source corpus.

We develop a model of internal governance where the self-serving actions of top management are limited by the potential reaction of subordinates. We find that internal governance can mitigate agency problems and ensure firms have substantial value, even without any external governance. Internal governance seems to work best when both top management and subordinates are important to value creation. We then allow for governance provided by external financiers and show that external governance, even if crude and uninformed, can complement internal governance in improving efficiency. Interestingly, this leads us 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. Finally, we explore how the internal organization of firms may be structured to enhance the role of internal governance. Our paper could explain why firms with limited external oversight, and firms in countries with poor external governance, can have substantial value.

Subfields: Accounting, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/bae4ca61b7225fea00d8932945c3e76cfaa0355b

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Accounting

1. Qiang Cheng
2. Jimmy Lee
3. Terry Shevlin
4. Renhui Fu
5. R. Rajan
6. I. Lee
7. Jun-Koo Kang
8. Lili Dai

In Strategy and Management

1. Qiang Cheng
2. Renhui Fu
3. Terry Shevlin
4. Jimmy Lee
5. R. Rajan
6. I. Lee
7. Jun-Koo Kang
8. Lili Dai

Citations in the corpus

• Corporate governance and the profitability of insider trading (2016, background): “this view, Acharya et al. (2011) emphasize the importance of internal corporate governance in”
• Corporate Governance Externalities (2010, unknown): “In this context, the lack of managerial mobility can in fact boost internal governance as managers internalize better the long-run implications of their actions (see also Acharya et al. (2008) for a recent theoretical contribution).”
• Internal Governance and Real Earnings Management (2016, background): “Because one of the fundamental reasons why key subordinate executives can influence CEOs’ decisions is their contribution to firm performance, the higher the subordinate executives’ contribution, the higher is their potential influence on CEOs (Finkelstein 1992; Acharya et al. 2011).”
• Presidential Address: The Corporation in Finance (2012, background): “Indeed, in Acharya, Myers, and Rajan (2011), the desire to obtain these rents makes employees interested in firm survival and allows them to check the otherwise rapacious behavior of the CEO.”
• Stakeholder Capitalism, Corporate Governance and Firm Value (2009, unknown): “depending on the kind of uncertainty firms face. Acharya, Myers, and Rajan (2008) also”