Endogenously Chosen Boards of Directors and Their Monitoring of Management

University of California at Berkeley, Boalt Hall School of Law Program in Law and Economics Working Paper 95-7

Posted: 8 May 1998

See all articles by Benjamin E. Hermalin

Benjamin E. Hermalin

University of California, Berkeley

Michael S. Weisbach

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Date Written: February 1996

Abstract

This paper develops a model in which the effectiveness of the board's monitoring of the CEO depends on the board's independence. The independence of the new directors is determined through negotiations (implicit or explicit) between the existing directors and the CEO. The CEO's bargaining position, and thus his influence over the board- selection process, depends on an updated estimated of the CEO's ability based on his prior performance. Many empirical findings about board structure and performance arise as equilibrium phenomena in this model. We also explore the implications of this model for proposed regulations of corporate governance structures.

JEL Classification: G32, G34

Suggested Citation

Hermalin, Benjamin E. and Weisbach, Michael S., Endogenously Chosen Boards of Directors and Their Monitoring of Management (February 1996). University of California at Berkeley, Boalt Hall School of Law Program in Law and Economics Working Paper 95-7. Available at SSRN: https://ssrn.com/abstract=10108

Benjamin E. Hermalin

University of California, Berkeley ( email )

545 Student Services Building, #1900
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Berkeley, CA 94720
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510-643-1420 (Fax)

Michael S. Weisbach (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI) ( email )

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B-1050 Brussels
Belgium

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