A Blessing in Disguise: Corporate Governance, Firm Value, and Competition

We develop simple models in which corporate governance affects the financing and the production level of firms. In this paper, better corporate governance implies governance under which a smaller firm value can be expropriated by the manager, ceteris paribus. We assume that the potential expropriation can occur after production. In the single firm model, we investigate how corporate governance affects the financing and the production selection of a firm. In the competition models, we investigate the effect of governance on competition as well as on financing and production in settings of Cournot duopoly and competition. The main results of the analyses include: (1) Firms may produce more under worse governance. (2) Worse governance may enhance firm value. (3) Worse governance may be associated with higher competition. (4) Socially optimal governance is worse than firm value maximizing governance.