A Framework for Assessing Corporate Governance Reform / Benjamin E. Hermalin, Michael S. Weisbach.

Format:

Book

Author/Creator:

Hermalin, Benjamin E.

Contributor:

National Bureau of Economic Research.

Weisbach, Michael S.

Series:

Working Paper Series (National Bureau of Economic Research) no. w12050.

NBER working paper series no. w12050

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2006.

Summary:

In light of recent corporate scandals, numerous proposals have been introduced for reforming corporate governance. This paper provides a theoretical framework through which to evaluate these reforms. Unlike various ad hoc arguments, this framework recognizes that governance structures arise endogenously in response to the constrained optimization problems faced by the relevant parties. Contract theory provides a set of necessary conditions under which governance reform can be welfare-improving: 1) There is asymmetric information at the time of contracting; or 2) Governance failures impose externalities on third parties; or 3) The state has access to remedies or punishments that are not available to third parties. We provide a series of models that illustrate the importance of these conditions and what can go wrong if they are not met.

Notes:

Print version record

February 2006.