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
Date Written: February 1996
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: Suggested Citation