Assessing Managerial Ability: Implications for Corporate Governance
A manager’s current and potential future employers are continually assessing her or his ability. Such assessment is a crucial component of corporate governance and this chapter provides an overview of the research on that aspect of governance. In particular, we review how assessment generates incentives (both good and bad), generates risks that must be faced by both managers and firms, and affects the contractual relationships between those parties in important ways. Assessment (or learning) proves a key perspective from which to study, evaluate, and possibly even regulate corporate governance. Moreover, because learning is a behavior notoriously subject to systematic biases, this perspective is a natural avenue through which to introduce behavioral and psychological insights into the study of corporate governance.
Forthcoming in The Handbook of the Economics of Corporate Governance. The authors thank Vivian Fang, Jongha Lim, Yihui Pan, Miriam Schwartz-Ziv, Berk Sensoy, Léa Stern, Luke Taylor, Ralph Walkling, and Tracy Wang for helpful comments on an earlier draft, and Shan Ge for excellent research assistance. Hermalin gratefully acknowledges the financial support of the Thomas & Alison Schneider Distinguished Professorship in Finance and the hospitality of Nuffield College, Oxford, where work on this chapter began. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.