An Empirical Investigation of Internal Governance

Acharya, Myers, and Rajan (2011) theorize that CEO rent extraction is constrained by subordinate managers. This internal governance works best when the relative contributions of CEOs and managers to output are balanced. Consistent with the theory, we find a hump-shaped relation between relative contributions and corporate investment, and between relative contributions and firm performance. These hump-shaped relations are stronger for firms with older CEOs, for firms more likely to promote insiders to CEO, for firms with non-founder CEOs, and for firms in growing industries. Other forms of governance do not diminish the importance of internal governance, and the results are robust to endogeneity concerns.