The Internal Governance of Firms

The Internal Governance of Firms

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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: , ,
Abstract:

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.

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