The Internal Governance of Firms

64 Pages Posted: 28 Feb 2009 Last revised: 30 Nov 2018

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)

Stewart C. Myers

Massachusetts Institute of Technology (MIT); National Bureau of Economic Research (NBER)

Raghuram G. Rajan

University of Chicago - Booth School of Business; International Monetary Fund (IMF); National Bureau of Economic Research (NBER)

Multiple version iconThere are 4 versions of this paper

Date Written: July 1, 2010

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, where dividends are paid by self-interested CEOs to maintain a balance between internal and external control. Our paper can explain why partnerships work well even if control rights are concentrated at the top, why a public firm’s shares have value even when shareholders have limited power, and when structuring an entity as a publicly-held firm is better than structuring it as a partnership.

Keywords: Agency theory, short-termism, corporate governance, dividends, internal organization

JEL Classification: G31, G32, G34, G35, D23, L21, M51

Suggested Citation

Acharya, Viral V. and Acharya, Viral V. and Myers, Stewart C. and Rajan, Raghuram G., The Internal Governance of Firms (July 1, 2010). European Corporate Governance Institute (ECGI) - Finance Working Paper No. 239/2009, Available at SSRN: https://ssrn.com/abstract=1350580 or http://dx.doi.org/10.2139/ssrn.1350580

Viral V. Acharya (Contact Author)

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

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Stewart C. Myers

Massachusetts Institute of Technology (MIT) ( email )

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National Bureau of Economic Research (NBER)

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Raghuram G. Rajan

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