TY - JOUR
T1 - Competition, managerial slack, and corporate governance
AU - Golan, Limor
AU - Parlour, Christine A.
AU - Rajan, Uday
N1 - Publisher Copyright:
© The Author 2015.
PY - 2015/3
Y1 - 2015/3
N2 - We model the interaction between product market competition and internal governance at firms. Competition makes it more difficult to infer a manager's action given the realized output, thus increasing the cost of inducing effort. An exogenous change in the incentive to shirk increases managerial slack. However, the effects on firm value are ambiguous; in particular, firm value can increase as slack increases. As a result, empirical tests that focus on changes in value may not capture changes in the level of slack. We also provide conditions under which increased competition leads all firms to switch from high to low effort.
AB - We model the interaction between product market competition and internal governance at firms. Competition makes it more difficult to infer a manager's action given the realized output, thus increasing the cost of inducing effort. An exogenous change in the incentive to shirk increases managerial slack. However, the effects on firm value are ambiguous; in particular, firm value can increase as slack increases. As a result, empirical tests that focus on changes in value may not capture changes in the level of slack. We also provide conditions under which increased competition leads all firms to switch from high to low effort.
UR - https://www.scopus.com/pages/publications/85049304324
U2 - 10.1093/rcfs/cfu011
DO - 10.1093/rcfs/cfu011
M3 - Article
AN - SCOPUS:85049304324
SN - 2046-9128
VL - 4
SP - 43
EP - 68
JO - Review of Corporate Finance Studies
JF - Review of Corporate Finance Studies
IS - 1
ER -