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NEW YORK--New research by NYU Stern Finance Professor Viral Acharya, with Stew Myers of MIT and Raghuram Ragu of Chicago GSB, finds that firms should invest in junior management because they impose an important discipline on top management and are closely tied to a firm’s long-term value. The authors call this “internal governance,” and believe it can be just as important for value creation as external governance through a Board of Directors.

“Issues of corporate governance are at the heart of whether companies can generate substantial value for investors and sustained, long-run growth of economies. Therefore, the role played by internal governance in unlocking firm value has far-reaching implications for companies, public policy, investors as well as consumers,” said Professor Acharya.

Key findings from this new conceptual framework provided by the authors include:

• Even when firms are run by top management who are shortsighted, the checks and balances imposed by junior management and employees can ensure long-term decisions are made and firm value preserved.
• The internal governance of firms works best in firms that have a “partnership” between top management and junior management.

An example is how well the model of partnerships (e.g., Goldman Sachs in pre-IPO days and McKinsey & Co.) works for businesses where human capital contributions are significant: the junior management are future owners of the firm, have the right long-term incentives, and their input is critical for current partners. This leads to the right internal governance structures, which were recently found missing (or broken) at banks and financial institutions.

To read the full paper, visit: http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/acharya_myers_rajan.pdf

To speak with Professor Viral Acharya contact him directly at 212-998-0354, vacharya@stern.nyu.edu; or contact Rika Nazem, NYU Stern’s Office of Public Affairs, 212-998-0678, rnazem@stern.nyu.edu.

August 5, 2009: http://www.businesswire.com/news/home/20090805005851/en