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Optimal Corporate Governance and Compensation in a Dynamic World

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  • Thomas H. Noe
  • Michael J. Rebello

Abstract

We model long-run firm performance, management compensation, and corporate governance in a dynamic, nonstationary world. Many features of governance and compensation that have caused consternation among commentators arise naturally in this dynamic setting, even though boards are rational and managers are powerless. Compensation changes depend on changes in the evolution of a latent state variable outside the manager's control. Board passivity is positively correlated with both the value of management compensation and the firm's good fortune. Managerial opportunism tends to follow sudden reversals of good fortune. Moreover, managerial private benefits, by increasing managers' stake in the long-run viability of the firm, may actually ameliorate agency conflicts. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

Suggested Citation

  • Thomas H. Noe & Michael J. Rebello, 2012. "Optimal Corporate Governance and Compensation in a Dynamic World," The Review of Financial Studies, Society for Financial Studies, vol. 25(2), pages 480-521.
    • Handle: RePEc:oup:rfinst:v:25:y:2012:i:2:p:480-521
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    File URL: http://hdl.handle.net/10.1093/rfs/hhr131
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    Cited by:

    1. Robert Kieschnick & Wenyun Shi, 2021. "Nonstationarity in the relationship between corporate governance and accounting conservatism," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 48(3-4), pages 463-497, March.
    2. Strebulaev, Ilya A. & Whited, Toni M., 2012. "Dynamic Models and Structural Estimation in Corporate Finance," Foundations and Trends(R) in Finance, now publishers, vol. 6(1–2), pages 1-163, November.
    3. Buchanan, Bonnie G. & Cao, Cathy Xuying & Wang, Shuhui, 2021. "Corporate social responsibility and inside debt: The long game," International Review of Financial Analysis, Elsevier, vol. 78(C).
    4. Qi Liu & Bo Sun, 2016. "Relative Wealth Concerns, Executive Compensation, and Systemic Risk-Taking," International Finance Discussion Papers 1164, Board of Governors of the Federal Reserve System (U.S.).
    5. Liu, Yun & Nanda, Vikram & Onal, Bunyamin & Silveri, Sabatino, 2021. "Employment mobility and pay for sector performance," Journal of Corporate Finance, Elsevier, vol. 70(C).
    6. Shang, Xiaodan & Luo, Chuanjian & Wen, Qian, 2020. "Do Chinese executives reward for luck?," Economic Modelling, Elsevier, vol. 92(C), pages 318-325.

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