The word “corporation,” derived from the Latin corpus, or body, refers to “a body formed and authorized by law to act as a single person.” [1] The study of corporate decisions typically models the corporate body as either (i) a single person, e.g., a manager, who maximizes expected utility with respect to a unique prior belief, or (ii) a decision-making group consisting of utility-maximizing individuals with identical prior beliefs, albeit possibly differentially informed. In reality, corporate boards and management teams are examples of groups where individuals with different opinions must collectively decide, as a single legal person, what the corporation is to do, often in the face of dramatically different views about whose model of the world is correct.
Posted by Lorenzo Garlappi, Ron Giammarino, and Ali Lazrak, University of British Columbia, on Sunday, October 8, 2017
Editor's Note: Lorenzo Garlappi is Associate Professor of Finance, Ron Giammarino is Professor of Finance, and Ali Lazrak is Associate Professor of Finance at the University of British Columbia Sauder School of Business. This post is based on a recent article, recently published in the Journal of Financial Economics, by Professor Garlappi, Professor Giammarino, and Professor Lazrak.