On the Efficiency of Internal and External Corporate Control Mechanisms

Abstract

Internal, organizationally based mechanisms of corporate control and external, market-based control mechanisms can be employed to help align the diverse interests of managers and shareholders. After reviewing the related work in organization theory and financial economics, this paper articulates the strengths and shortcomings of both types of control mechanisms; it also identifies a variety of managerial entrenchment practices that managers can use to compromise these mechanisms. A theoretical framework is developed next that explicates the interrelationships between and among these corporate control mechanisms. A number of research opportunities that span the disciplines of organization theory and financial economics are identified.