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Endogenously Chosen Boards of Directors and their Monitoring of the CEO
Benjamin E. Hermalin University of California, Berkeley Michael S. Weisbach Ohio State University - Department of Finance; National Bureau of Economic Research (NBER) American Economic Review, Vol. 88 Abstract: How can boards be chosen through a process partially controlled by the CEO, yet, in many instances, still be effective monitors of him? We offer an answer based on a model in which board effectiveness is a function of its independence. This, in turn, is a function of negotiations (implicit or explicit) between existing directors and the CEO over who will fill vacancies on the board. The CEO's bargaining power over the board-selection process comes from his perceived ability relative to potential successors. Many empirical findings about board structure and performance arise as equilibrium phenomena of this model.
JEL Classifications: D23, D73, G39, K22, L29 Accepted Paper SeriesDate posted: September 04, 1998 ; Last revised: September 08, 1998Suggested CitationContact Information
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