2. Corporate ownership structure, corporate governance, firm performance, and capital structure
Some governance features may be motivated by incentive-based economic models of managerial behavior. Broadly speaking,
these models fall into two categories. In agency models, a divergence in the interests of managers and shareholders causes
managers to take actions that are costly to shareholders. Contracts cannot preclude this activity if shareholders are unable to
observe managerial behavior directly, but ownership by the manager may be used to induce managers to act in a manner that is
consistent with the interest of shareholders. Grossman and Hart (1983) describe this problem.
Adverse selection models are motivated by the hypothesis of differential ability that cannot be observed by shareholders. In this
setting, ownership may be used to induce revelation of the manager's private information about cash flowor her ability to generate
cash flow, which cannot be observed directly by shareholders. A general treatment is provided by Myerson (1987).