A Theory of Board Control and Size
University of Chicago - Finance
Northwestern University - Kellogg School of Management
The Review of Financial Studies, Vol. 21, Issue 4, pp. 1797-1832, 2008
This article presents a model of optimal control of corporate boards of directors. We determine when one would expect inside versus outside directors to control the board, when the controlling party will delegate decision-making to the other party, the extent of communication between the parties, and the number of outside directors. We show that shareholders can sometimes be better off with an insider-controlled board. We derive endogenous relationships among profits, board control, and the number of outside directors that call into question the usual interpretation of some documented empirical regularities.
JEL Classification: G34Accepted Paper Series
Date posted: August 8, 2008
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