Limits on managerial discretion in management buyouts: the effectiveness of institutional, market and legal mechanisms

Recent changes in the legal environment faced by US corporations suggest that the shareholder-manager conflict of interest, and the effectiveness of mechanisms to narrow this divergence, are issues of continuing importance. This study examines the linkages between institutional, market and legal mechanisms to control managerial discretion in management buyouts, and the circumstances under which each type of mechanism is effective. We find that these mechanisms do act to control managerial discretion in management buyouts to some degree. At the same time, there appear to be significant frictions which act to partially insulate managers from these types of governance, limiting their effectiveness. © 1997 John Wiley & Sons, Ltd.