Assessing Managerial Ability: Implications for Corporate Governance

A manager’s current and potential future employers are continually assessing her or his ability. Such assessment is a crucial component of corporate governance and this chapter provides an overview of the research on that aspect of governance. In particular, we review how assessment generates incentives (both good and bad), generates risks that must be faced by both managers and firms, and affects the contractual relationships between those parties in important ways. Assessment (or learning) proves a key perspective from which to study, evaluate, and possibly even regulate corporate governance. Moreover, because learning is a behavior notoriously subject to systematic biases, this perspective is a natural avenue through which to introduce behavioral and psychological insights into the study of corporate governance.

Keywords: Corporate Governance, Career Concerns, Learning and Assessment, Cognitive Biases

JEL Classification: G34, M12, D83, D81

Suggested Citation: Suggested Citation

Hermalin, Benjamin E. and Weisbach, Michael S., Assessing Managerial Ability: Implications for Corporate Governance (January 22, 2017). Forthcoming, The Handbook of the Economics of Corporate Governance, Charles A. Dice Center Working Paper No. 2017-01, Fisher College of Business Working Paper No. 2017-03-001, Available at SSRN: https://ssrn.com/abstract=2904346 or http://dx.doi.org/10.2139/ssrn.2904346