Irrelevance of Governance Structure

Does corporate governance structure matter for firm value? We develop a model in which the allocation of control rights between shareholders and managers (“governance structure”) affects managers’ incentive to invest (strong governance tightens managerial freedom and weak governance loosens it), and firms’ investment decisions are linked through a market for resources. We show that in a competitive equilibrium, which is socially efficient, corporate governance is irrelevant to firm value even in the presence of agency costs and incomplete markets. Our analysis therefore provides an important benchmark against which the effects of governance structures could be evaluated.