Corporate GovernanceIntroduction презентация

deals with the ways in which the suppliers of finance to corporations assure themselves on getting a return on their investment”
Tirole: interests of stakeholders other than investors should also be taken into account
Most generally (Zingales): CG is a set of mechanisms that shape relationships between all parties to a firm. Ideally, this set should provide the parties with incentives to do ex-ante efficient investments (not necessarily monetary) and ensure efficient bargaining ex-post

goal of corporate governance is to maximize “pledgeable income” (at the lowest cost)
“Pledgeable income”: how much (in expected terms) the manager can credibly promise to return to investors.
The greater it is the more confident investors are in getting their money back, hence, the more willing they are to invest in positive NPV projects

< 0

Incentive scheme: E gets w if success, 0 if failure.

Incentive compatibility (no private benefit extraction): Δpw ≥ B

Setting w at B/Δp, we get that the maximum (gross) return the investors can get, given IC holds:
(p+Δp)(XH – (B/Δp))

Financing stage

Project costs I. Entrepreneur has A

Moral hazard stage

Choice of probability of success: p+Δp (no private benefit) or p (private benefit B)

Outcome stage

Verifiable profit: X∈{0, XH}; Pr[X=XH] = either p+Δp or p

pledgeable income through the reduction of private benefits
It should be done in the least costly way (optimal combination of the corporate governance mechanisms)

Hence, financing is feasible iff
(p+Δp)(XH – (B/Δp)) ≥ I – A
i.e. pledgeable income exceeds the investors’ outlay

for compensation based on stock price and other measures of performance (shares, stock-options, bonuses)
Has risen in the US since 1970, especially due to a rise in the use of stock options in 90’s ⇒ high pay-performance sensitivity (in the US equity based compensation is on average 50-60% of the total compensation)
But is it an outcome of optimal contracting? Evidence suggests that maybe not, managers can pay themselves too much because they capture the process of setting compensation
Stock-based compensation involves costs: e.g. short termism, excessive risk (stock options), insufficient effort (stock options), earnings manipulation…

is often captured by the management or controlling shareholders
Hence, in theory, need for “independent” directors
But overall empirical evidence yields very ambiguous conclusions about the effects board composition on firm value

costs
Lack of diversification
Lack of liquidity
Excessive monitoring
Pursuing own goals at the expense of other investors

should succeed
Value decreasing takeovers should fail
Failure of both goals may occur in reality

reality sometimes fail
Conflicts of interest
Lack of incentives (lack of competition)

Activism (all kinds of pressure by a shareholder (often an institution) on management: shareholder proposals, “focus list” of poor performers, articles in media, etc.)
Shareholder litigation
Overall, minority shareholder actions are rare outside US and UK, empirically have rather limited effect
Russia: Hermitage case (see Dyck, Volchkova and Zingales (2005))

abroad)
Sound dividend policy
…

We will consider Large Shareholders and Takeovers in more detail now…