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Abstract

We develop a model to study the impact of corporate governance on firm investment decisions

and industry competition. In the model, governance structure affects the distribution of shares

among short- and long-term oriented investors, the robustness of the management regarding possible

stockholder interference, and the managerial remuneration scheme. A bargaining process

between firm’s stakeholders determines the optimal allocation of financial resources between real

investments in R&D and financial investments in shares buybacks. We characterize the relation

between corporate governance and firm’s optimal investment strategy and we study how different

governance structures shape technical progress and the degree of competition over the industrial

life cycle. Numerical simulations of a calibrated set-up of the model show that pooling together

industries characterized by heterogeneous governance structures generate the well-documented

inverted-U shaped relation between competition and innovation.

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