This paper discusses a model that combines internal and external control mechanisms in a firm in which assets can have alternative uses that are in some states more profitable than the current one. However, restructuring
a firm in order to realize the gains from alternative uses affects managers
adversely since they invest in firm-specific human capital. Managers can be
motivated to restructure the firm through their compensation scheme. Alternatively, investors can acquire costly information on the firm and interfere with managers' decisions. The main focus is on independent directors, who review and monitor contracts and managers' compensation. If
information is not too costly, directors are the optimal institution to
check managerial discretion and the degree of managerial entrenchment depends on the compensation of independent directors. However, if directors fail to exercise control over management properly, takeovers or creditor
control become second-best solutions. If information is costly to transfer,
unchecked managerial control may be optimal.
Dieser Datensatz wurde nicht während einer Tätigkeit an der Universität Mannheim veröffentlicht, dies ist eine Externe Publikation.
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