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The Conflicts of Interest among Investors and Integration of Corporate Governance



This paper explores the function of integration of the internal and external control systems in mitigating the conflicts of interest among shareholders under the framework of entrepreneur (controlling investors) subject to moral hazard. We show that the existence of external control system would enhance the monitoring function of the internal control system, and as a result restrain the moral hazard behaviors of the entrepreneur. The relationship between the internal and external control system is not the simple monotonic one, which is different from the traditional viewpoints of corporate governance literature. The transfer from one relationship to another one depends on whether the entrepreneur’s incentive compatibility constraints are satisfied by the contracts between the entrepreneur and the dispersed shareholders.