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An Economic Analysis of Corporate Directors' Fiduciary Duties

Author

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  • Gutierrez, M.

Abstract

This paper studies how the legal liability rules for directors can be optimally designed to provide them with the incentives to fulfill their fiduciary duties and to maximize ex-ante firm value. I present a principal-agent model where the shareholders can obtain a verifiable but costly and imperfect signal on the director's fulfillment of his fiduciary duties by taking legal action against him. This allows the firm to make the director's remuneration contingent not only on performance but also upon the court's decision.The paper shows that, when damages awards are high, the widespread use of liability insurance and limited liability provisions that is observed in the US is optimal because it allows shareholders to credible commit to an optimal suing strategy.

Suggested Citation

  • Gutierrez, M., 2000. "An Economic Analysis of Corporate Directors' Fiduciary Duties," Papers 0014, Centro de Estudios Monetarios Y Financieros-.
    • Handle: RePEc:fth:cemfdt:0014
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    Citations

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    Cited by:

    1. Josep Pijoan-Mas, 2006. "Precautionary Savings or Working Longer Hours?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(2), pages 326-352, April.
    2. M. Martin Boyer & Amandine Hanon, 2009. "Protecting Directors and Officers from Liability Arising from Aggressive Earnings Management," CIRANO Working Papers 2009s-35, CIRANO.

    More about this item

    Keywords

    CORPORATIONS ; INSURANCE ; INCOME;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • K40 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - General

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