Article ID: | iaor201112059 |
Volume: | 66 |
Issue: | 3 |
Start Page Number: | 689 |
End Page Number: | 720 |
Publication Date: | Jun 2011 |
Journal: | The Journal of Finance |
Authors: | Acharya Viral V, Myers Stewart C, Rajan Raghuram G |
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, in which dividends are paid by self‐interested CEOs to maintain a balance between internal and external control.