Abstract
We develop a model to study the impact of corporate governance on the investment decisions of firms and competition in an industry populated by publicly owned firms. A bargaining process between firm’s stakeholders determines the optimal allocation of financial resources between real investments in R&D and financial investments in shares buybacks. We characterize the relation between governance and investment strategy and we study how different governance structures shape technical progress and competition over the industrial life cycle. Numerical simulations of a calibrated set-up of the model show that pooling together industries characterized by heterogeneous governance structures generate the well-documented inverted-U shaped relation between competition and innovation.
Highlights
Recent empirical evidence indicates the existence of an inverted-U shaped relation between innovation and competition.1 This relationship is mediated by a variety of factors
We develop a model to study the impact of corporate governance on firm investment decisions and industry competition
After having calibrated the model and verified its ability to match empirical evidence, we proceed to a battery of Monte Carlo simulation exercises to explore how firm governance structure impacts on industry evolution with a special emphasis on the relation between innovation and competition
Summary
Recent empirical evidence indicates the existence of an inverted-U shaped relation between innovation and competition (see, e.g., Aghion et al, 2005). This relationship is mediated by a variety of factors. Recent empirical evidence indicates the existence of an inverted-U shaped relation between innovation and competition (see, e.g., Aghion et al, 2005).. Those studies have not formulated a comprehensive theory describing how the interaction among different aspects of corporate governance may influence innovation by heterogeneous firms, and how the latter may in turn shape the process of competition within an industry. This is the main task we try to accomplish in this paper
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