Experts, Governance, and Collusion: Can Incentives and Reputation Salvage the Destruction of Firm Value

Location: Room D221, Social Sciences Building, St John Street, City University London, EC1R 0JD

The paper shows that collusion between CEO and expert intermediaries destroys value of firm only when it his hit by bad news and expert's skill for processing signal is low and CEO is inept. Collusion forces shareholders to incur extra costs in the form of increased incentive and severance payments. The low ability expert's incentive to build up reputation of honesty is weaker even in repeated interactions with clients. The high quality experts are reputable and facilitate disclosures of bad news and help firms to restructure bad projects. They earn higher lifetime income and their clients frequently renew contractual arrangements.

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