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By means of an agency model, we show whether and when firms are interested in adopting a Code of Corporate Governance. The Code allows the shareholder to reduce the manager’s discretion, but it makes the manager less efficient due to the over-emphasis on monitoring. Our results suggest that if a voluntary Code is available, not all firms will be interested in it. In firms that do adopt it, the Code is not always used to reach more efficient outcomes. We show under which conditions the introduction of the code attenuates the underinvestment problem caused by the agency relationship. Finally, we analyse some features that a regulator protecting shareholder’s wealth should consider. Our findings suggest that heterogeneity in Codes may be partially explained by differences in the distribution of firms or by different abilities of the regulator.

The adoption of a code of corporate governance: incentive implications