Complicated problems of aligning incentives, auditing, monitoring, inducing investment in specialized assets, devising protective governance structures, and the like, arise when conditions of bounded rationality and opportunism are joined.
The rising importance of corporate sustainability has revived an old debate from the 1970s and 80s about the appropriate objectives of corporations and, by implication, about the appropriate governance of corporate conduct. While the need for a more sustainable economy is beyond debate, the conceptual foundations are elusive.
The dominant paradigm holds that shareholders as residual claimants are best incentivized to safeguard the long-term interests of the corporations they own. However, evidence on market failures and behavioral anomalies but also the heterogeneity of investor types challenge important assumptions of this prevalent paradigm and calls for a reconsideration of the old debate.
The path ahead
My research agenda for the following years will use the Contractarian view of the firm as a starting point to analyze the wider implications of bounded rationality, non-financial objectives and investor heterogeneity with respect to effective corporate governance. In this process, I relax various assumptions of the traditional nexus-of-contracts view of the firm, such as the efficiency of factor markets and the unity of shareholder interests, to generate new empirical and conceptual insights on effective corporate governance from the perspective of procedural efficiency.
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Work in progress
Contractual incentives and corporate externalities. Cross-country evidence from China, Turkey and the US
(with J. Shachat)
Recent evidence documents the crucial impact of managerial preferences on corporate social responsibility strategies. Moreover, a proliferating body of research documents cross-country differences in preferences about fairness, efficiency and cooperation. This article investigates cross-country differences in contract choices and firm strategies in delegated decisions with externalities to inform the debate about the optimal governance of corporate externalities across different cultural contexts.
Robbing Peter to Pay Paul? Charitable preferences, incentives, and corporate externalities
In this article, we present evidence on the common presumption that charitable preferences of managers are a source of agency costs when they can donate on behalf of their principals. Leaving normative arguments aside, we investigate the descriptive validity of this claim when agents have full discretion over their effort investment as well as the social impact of the firm. Our results show that net donations are negative, i.e., agents harm an external party to
increase payoffs for their principals rather than donate. Contractual bonuses induce proselfs but not prosocials to engage in rent extraction by violating the property rights of the external party. Our study informs the normative debate about optimal incentives in delegated social dilemmas and has important implications for the current debate about responsible capitalism.
Revisiting the concept of residual claimants in light of the current debate about corporate purpose
The essay examines the traditional understanding of residual claimants as the owners of the firm who receive any leftover profits after all other stakeholders have been paid, and considers how this concept may need to be revised in light of the evolving understanding of corporate purpose. Specifically, the essay analyzes the implications of the shift towards stakeholder capitalism and considers how fiduciary duties may need to be redefined to align with this new paradigm.
A test of the Modigliani-Miller theorem, dividend policy and algorithmic arbitrage in experimental asset markets
with Tibor Neugebauer and Jason Shachat, Journal of Banking and Finance
Losing funds or losing face? Reputation and accountability in the credit rating industry
with Martin Angerer and Matthias Herrmann-Romero, Journal of Economic Dynamics and Control