Managerial Entrenchment and the Market for CEOs
IE Business School - IE University
June 10, 2014
This paper studies firms governance choices in the presence of a broadening market for managers. Board independence reduces the likelihood of managerial entrenchment but is costly, for example because of poorer decision making due to a lack of information sharing in the boardroom. Hence, firms trade off costs and benefits of independent boards. As managerial skills become less firm-specific and more portable across firms, the market for CEOs becomes wider and managerial pay increases. Moreover, a broader market for talent creates better replacement opportunities of incumbent CEOs. As a consequence, large firms, where managerial talent is more productive, choose more independent boards. Equilibrium outcomes are however inefficient if managers are subject to moral hazard and can exert effort to improve the perception of their talent. In particular, if managerial skills are general enough, boards are overly independent and managers exert inefficiently high effort in equilibrium.
Number of Pages in PDF File: 31
Keywords: Executive Compensation, Managerial Entrenchment, Career Concerns
JEL Classification: D83, D86, G34
Date posted: February 14, 2009 ; Last revised: June 11, 2014
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