Abstract:This paper aims at analyzing the role of the incentives provided by the adoption of a Code of Best Practice. Unlike the existing studies, we investigate the adoption choice through a principal-agent model. Firms are allowed to adopt the Code to verify manager's actions. Our results suggest that if a voluntary Code is available, not all firms will be interested in it. Besides, when adopting a Code, it may induce either an increase or a decrease in the manager's effort. Regarding investment decisions, we show that a proper design of a Code can, for instance, alleviate the underinvestmen't problem caused by the moral hazard effect. Finally, we analyze some of the 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.

Keywords: Codes of Best Practice, Corporate Governance, Principal-agent model, Limited Liability.

JEL Classification: D-23, G-38, L-20.