The Market for Corporate Control

A well-functioning governance system consists of more than a board of directors to provide oversight for the corporation and an external auditor to ensure the integrity of financial reporting. It includes all disciplining mechanisms—legal, regulatory, and market driven—that influence management to act in the interest of shareholders. For example, in Chapter 7, we examined how a competitive labor market for CEOs puts pressure on management to perform or risk being replaced by another executive, either from within or outside the company, who can deliver better corporate results.

Instead of removing an executive, the board of directors (or in some cases shareholders directly) can decide to transfer ownership ...

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