David I. Walker
Boston University School of Law Working Paper 05-02
Abstract
It is sometimes argued in the corporate governance literature that the
total share of corporate value that can be extracted by a manager is fixed
and independent of the avenues through which value is extracted. Shareholders
need not worry about an activity such as insider trading, the story goes,
because any profits achieved by a manager through insider trading will
simply offset conventional compensation. This article challenges that
idea and argues that whether one views the manager’s share as being
capped by external market forces, set by an optimal principal/agent contract,
or limited by saliency and outrage in accordance with a managerial power
view of corporate governance, the total value that can and will be appropriated
by managers will be a function of the number and type of avenues through
which value can be appropriated.
Although the foregoing theories provide the same overall prediction that
additional avenues of appropriation increase total managerial appropriation,
the factors affecting the magnitude of the effect depend on the model
or mechanism employed. For example, potential avenues of appropriation
that are easily monitored and under the unilateral control of the directors,
such as bonuses or perks, should have little affect on incremental appropriation
under an optimal contracting model, but could have significant impact
under a managerial power model. A review of the relevant empirical literature
suggests that additional avenues of appropriation do indeed lead to greater
overall appropriation. The evidence, moreover, is largely inconsistent
with the optimal contracting view.
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David I. Walker Contact Information
diwalker@bu.edu
Boston University School of Law
765 Commonwealth Ave
Boston, MA 02215
USA
(617) 353-3174
Presentation and Publication Information:
To be announced.
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