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A Primer on Corporate Governance: by Jean Chen

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CHAPTER 3

External Corporate Governance Mechanisms

The corporate governance mechanisms can be categorized into two types: internal and external governance mechanisms (Denis and McConnell 2003; Gillan 2006). The internal governance mechanisms primarily focus on boards of directors, ownership and control, and managerial incentive mechanisms, whereas the external governance mechanisms cover issues related to the external market and laws and regulations (e.g., the legal system).

The simple balance sheet model of the firm, as shown in Figure 3.1, captures the essence of the rationale of such categorization, that is, internal and external corporate governance mechanisms. The left-hand side of the figure shows the basic components of internal governance ...

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