RT Dissertation/Thesis
T1 Essays on the economic theory of managerial incentives
A1 Feriozzi, Fabio
AB Corporations are very common in the business world. In this kind of organizationsshareholders are protected by limited liability and, furthermore, they can easily transfertheir shares. As a consequence, investors might be interested in buying a corporation'sshares just to diversify their portfolios, without any real interest in getting involved inmanagement. It is therefore much easier for corporations to obtain external finance thanother organizational forms, and this might well be the basic reason for their wide diffusion.For the very same reason, however, it is necessary to hire professional managers to makeall the relevant decisions, and this contains the seed of their problematic governance. Infact, the separation of ownership and control produces a conflict of interest between shareholders,interested in maximizing the firm value, and managers, who can be interested inpursuing a variety of different objectives (empire building, entrenchment, shirking, etc.).This dissertation is composed by three research papers dealing with the economicsof managerial incentive provision. It is common to interpret the relationship betweenshareholders and managers as an agency relationship affected by both a moral hazardand adverse selection problem. Usually, managerial incentives are affected by severalelements such as, for example, their compensation packages and career concerns, theinternal monitoring of the board of directors, the external monitoring of the market forcorporate control, etc. This dissertation suggests that it might be necessary to considerOverview 2the interactions between alternative incentive mechanisms both to better understand theirfunctioning and, at least as importantly, to help interpreting empirical observations.The first chapter, Paying for Observable Luck, proposes a simple hidden action modelwhich explains recent empirical evidence of asymmetric benchmarking in managerial compensation:managers appear to be insulated from bad luck but not from good luck. Theexplanation hinges on the interaction between explicit contractual incentives and implicitincentives deriving from the possibility of bankruptcy. The second chapter, CareerConcerns and Competitive Pressure, studies how the level of competition in the productmarket a ects the strength of managerial career concerns. Good managers are in shortsupply so that firms are willing to compete for them. However, the value of good managersdepends on the profit differential they are able to produce on the product market.It is then shown that increased competition makes career concerns stronger if it increasessuch profit differential. The third chapter, Managerial Entrenchment and the Marketfor CEOs, suggests that the observed trends of increased managerial pay and increasedboard independence might be related. Boards captured by an entrenched managers arenot active on the demand side of the managerial labor market. Therefore, increasedboard independence, reducing the number of captured boards, also increases competitionfor good managers, then rising their pay and making their career concerns stronger.
YR 2007
FD 2007-07
LK https://hdl.handle.net/10016/2548
UL https://hdl.handle.net/10016/2548
LA eng
LA eng
DS e-Archivo
RD 18 may. 2024