Corporate Governance Externalities

Posted: 25 Jan 2010

See all articles by Viral V. Acharya

Viral V. Acharya

New York University (NYU) - Leonard N. Stern School of Business; New York University (NYU) - Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

Paolo F. Volpin

Drexel University - Bennett S. LeBow College of Business; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); City University London - Faculty of Finance

Multiple version iconThere are 4 versions of this paper

Date Written: January 2010

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.

Keywords: G34, J63, K22, K42, L14

Suggested Citation

Acharya, Viral V. and Acharya, Viral V. and Volpin, Paolo F., Corporate Governance Externalities (January 2010). Review of Finance, Vol. 14, Issue 1, pp. 1-33, 2010, Available at SSRN: https://ssrn.com/abstract=1541042 or http://dx.doi.org/rfp002

Viral V. Acharya (Contact Author)

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New York University (NYU) - Department of Finance ( email )

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Paolo F. Volpin

Drexel University - Bennett S. LeBow College of Business ( email )

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Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

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HOME PAGE: http:/www.ecgi.org

City University London - Faculty of Finance ( email )

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Great Britain

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