Abstract

http://ssrn.com/abstract=607861
 
 

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A Theory of Board Control and Size


Milton Harris


University of Chicago - Finance

Artur Raviv


Northwestern University - Kellogg School of Management


CRSP Working Paper No. 559
Review of Financial Studies, 2008

Abstract:     
We extend the traditional view of corporate boards as monitors to include a role for outside board members as suppliers of expertise or information. Indeed, both outsiders and insiders may have private information relevant to the decision. Because of the agency problem between managers and owners (who are assumed to be represented by the outside directors), neither party will communicate his or her information fully to the other. Outsiders in our model control agency problems by making some decisions themselves. When they do, the refusal of insiders to communicate their information fully becomes costly. Therefore, shareholders can sometimes be better off by having boards controlled by insiders. We characterize whether the board is optimally controlled by insiders or outsiders, the optimal number of outsiders, and resulting profits as functions of the importance of insiders' and outsiders' information, the extent of agency problems, and some other factors. This leads to an endogenous relationship between profits and the number of outside directors that furthers our understanding of some documented empirical regularities.

Number of Pages in PDF File: 58

Keywords: Board of Directors, Board Control, Board Size, Corporate Governance

JEL Classification: G3, C72

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Date posted: November 17, 2005 ; Last revised: January 15, 2008

Suggested Citation

Harris, Milton and Raviv, Artur, A Theory of Board Control and Size. CRSP Working Paper No. 559; Review of Financial Studies, 2008. Available at SSRN: http://ssrn.com/abstract=607861

Contact Information

Milton Harris (Contact Author)
University of Chicago - Finance ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
(773) 702-2549 (Phone)
(773) 753-8310 (Fax)
HOME PAGE: http://faculty.chicagobooth.edu/milton.harris/

Chicago Booth School of Business Logo

Artur Raviv
Northwestern University - Kellogg School of Management ( email )
2001 Sheridan Road
Evanston, IL 60208
United States
847-491-8342 (Phone)
847-491-5719 (Fax)
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