The Adoption of a Code of Best Practice: Incentive Implications

Eduard Alonso-Pauli ()

No 07.18, Working Papers from Universidad Pablo de Olavide, Department of Economics

Abstract: We study the incentives induced by the adoption of a Code of Best Practice. Using an agency model, we analyze whether and when firms are interested in adopting a Code that allows the shareholder to reduce the manager's discretion. Our results suggest that if a voluntary Code is available, not all firms will be interested in it. In firms that do adopt it, the Code is not always used to reach more efficient outcomes. Regarding investment decisions, we show that a proper design of a Code can alleviate the distortions caused by the agency problem at the investment level. Finally, we analyze some features that a regulator protecting shareholder's wealth should consider. Our findings suggest that heterogeneity in Codes may be partially explained by differences in the distribution of firms or by different abilities of the regulator.

Keywords: Codes of Best Practice; Corporate Governance; Agency model; Limited Liability (search for similar items in EconPapers)
JEL-codes: G38 D23 L20 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec
Date: 2007-12
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Persistent link: http://EconPapers.repec.org/RePEc:pab:wpaper:07.18

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