Codes of Best Practice in competitive markets for

Authors: Eduard AlonsoPaulí David PérezCastrillo

Publish Date: 2010/05/07

Volume: 49, Issue: 1, Pages: 113-141

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Abstract

We study the corporate governance of firms in environments where possibly heterogeneous shareholders compete for possibly heterogeneous managers A firm formed by a shareholder and a manager can sign either an incentive contract or a contract including a Code of Best Practice A Code allows for better management control but makes it hard for managers to react quickly when market conditions change Codes tend to be adopted in markets with low volatility and in environments where managers obtain low levels of benefits The firms with the best projects tend to adopt a Code when managers are not too heterogeneous while the best managers tend to be hired through incentive contracts when the projects are similar Although the matching between shareholders and managers is often positively assortative shareholders with the best projects might be willing to renounce hiring the best managers instead signing contracts including Codes with lowerability managersWe thank Inés MachoStadler Pau Olivella Nicolas Porteiro Pedro Rey Vicente LópezCuñat Antonio Jesús Sánchez Fuentes and an anonymous referee as well as seminar participants at the Universities of Brown Padova Venezia Autónoma de Barcelona and Queen’s at Belfast and participants in presentations at the Third Congress of the Game Theory Society Chicago and the Summer School on Corporate Governance Santander for their helpful comments We gratefully acknowledge financial support from projects SEJ200600538ECON SEJ200907616ECON ECO200804321/ECON 2009SGR169 ConsoliderIngenio CSD200600016 Barcelona EconomicsXarxa CREA and ICREA Academia David PérezCastrillo is a research fellow of MOVE

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