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Competition, Managerial Slack, and Corporate Governance

Author

Listed:
  • Limor Golan
  • Christine A. Parlour
  • Uday Rajan

Abstract

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.

Suggested Citation

  • Limor Golan & Christine A. Parlour & Uday Rajan, 2015. "Competition, Managerial Slack, and Corporate Governance," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 4(1), pages 43-68.
    • Handle: RePEc:oup:rcorpf:v:4:y:2015:i:1:p:43-68.
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    File URL: http://hdl.handle.net/10.1093/rcfs/cfu011
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    References listed on IDEAS

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    Cited by:

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    3. Dam, Kaniṣka & Robinson-Cortés, Alejandro, 2020. "Executive compensation and competitive pressure in the product market: How does firm entry shape managerial incentives?," Mathematical Social Sciences, Elsevier, vol. 106(C), pages 60-77.

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