A Framework for Assessing Corporate Governance Reform

Benjamin Hermalin and Michael Weisbach

No 12050, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: G30 G38 L51 (search for similar items in EconPapers)
Date: 2006-02
New Economics Papers: this item is included in nep-fin and nep-reg
Note: CF
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Citations: View citations in EconPapers (17)

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