2020/35 | LEM Working Paper Series | ||||||||||||||||
Governance structure, technical change and industry competition |
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Mattia Guerini, Philipp Harting and Mauro Napoletano |
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Keywords | |||||||||||||||||
governance structure; industry dynamics; competition; technical change.
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JEL Classifications | |||||||||||||||||
G34, L22, M12
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Abstract | |||||||||||||||||
We develop a model to study the impact of corporate governance on firm investment decisions
and industry competition. In the model, governance structure affects the distribution of shares
among short- and long-term oriented investors, the robustness of the management regarding
possible stockholder interference, and the managerial remuneration scheme. 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 corporate governance and firm’s optimal investment strategy and we study how different
governance structures shape technical progress and the degree of 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.
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