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Codes of Best Practice in Competitive Markets for Managers

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Author Info
Eduard Alonso-Paulí ()
David Pérez-Castrillo ()

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Abstract

We study firms' corporate governance in environments where possibly heterogeneous shareholders compete for possibly heterogeneous managers. A firm, formed by a shareholder and a manager, can sign either an incentive contract or a contract including a Code of Best Practice. A Code allows for a better manager's control but makes manager's decisions hard to react when market conditions change. It tends to be adopted in markets with low volatility and in low-competitive environments. The firms with the best projects tend to adopt the Code when managers are not too heterogeneous while the best managers tend to be hired through incentive contracts when the projects are similar. Although the matching between shareholders and managers is often positively assortative, the shareholders with the best projects might be willing to renounce to hire the best managers, signing contracts including Codes with lower-ability managers.

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Paper provided by Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC) in its series UFAE and IAE Working Papers with number 726.08.

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Length: 40
Date of creation: 16 Feb 2008
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Handle: RePEc:aub:autbar:726.08

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Keywords: Corporate Governance; Incentives; Moral Hazard; Matching model;

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