How Institutional Cross-Ownership Can Improve Corporate Governance

A corporation’s governance structure does not exist in a vacuum: It can impose externalities on other firms. The existing literature has argued that those externalities can arise because companies interact with each other through various types of relationships. For example, according to Acharya and Volpin (2010), firms compete against each other in the managerial labor market. When a firm’s competitors adopt a low level of governance (e.g., by appointing a weak board of directors) and thus allow their managers to extract large benefits for themselves, the firm’s managers have an incentive to join those competitors, which in turn forces the … Read more