TY  - JOUR
AU  - Hermalin,Benjamin E.
AU  - Weisbach,Michael S.
TI  - A Framework for Assessing Corporate Governance Reform
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12050
PY  - 2006
Y2  - February 2006
UR  - http://www.nber.org/papers/w12050
L1  - http://www.nber.org/papers/w12050.pdf
N1  - Author contact info:
Benjamin Hermalin
Walter Haas School of Business
545 Student Services Building, #1900
University of California
Berkeley, CA  94720-0001
Tel: (510) 642-7575
Fax: (510) 643-1420
E-Mail: hermalin@haas.berkeley.edu

Michael Weisbach
Department of Finance
Fisher College of Business
Ohio State University
2100 Neil Ave.
Columbus, OH  43210
Tel: 614 292 3264
E-Mail: weisbach.2@osu.edu
AB  - In light of recent corporate scandals, numerous proposals have been introduced for reforming corporate governance. This paper provides a theoretical framework through which to evaluate these reforms. Unlike various ad hoc arguments, this framework recognizes that governance structures arise endogenously in response to the constrained optimization problems faced by the relevant parties. Contract theory provides a set of necessary conditions under which governance reform can be welfare-improving: 1) There is asymmetric information at the time of contracting; or 2) Governance failures impose externalities on third parties; or 3) The state has access to remedies or punishments that are not available to third parties. We provide a series of models that illustrate the importance of these conditions and what can go wrong if they are not met.
ER  -