The Costs of Intense Board Monitoring

54 Pages Posted: 18 Feb 2009 Last revised: 5 Dec 2012

See all articles by Olubunmi Faleye

Olubunmi Faleye

Northeastern University - Finance Group

Rani Hoitash

Bentley University - Department of Accountancy

Udi Hoitash

Northeastern University - Accounting Group

Date Written: September 23, 2010

Abstract

We study the effects of the intensity of board monitoring on directors’ effectiveness in performing their monitoring and advising duties. We find that monitoring quality improves when a majority of independent directors serve on at least two of the three principal monitoring committees. These firms exhibit greater sensitivity of CEO turnover to firm performance, lower excess executive compensation, and reduced earnings management. The improvement in monitoring quality comes at the significant cost of weaker strategic advising and greater managerial myopia. Firms with boards that monitor intensely exhibit worse acquisition performance and diminished corporate innovation. Firm value results suggest that the negative advising effects outweigh the benefits of improved monitoring, especially when acquisitions or corporate innovation are significant value drivers or the firm’s operations are complex.

Keywords: Board committees, board monitoring, board advising, executive incentives, firm value

JEL Classification: G34

Suggested Citation

Faleye, Olubunmi and Hoitash, Rani and Hoitash, Udi, The Costs of Intense Board Monitoring (September 23, 2010). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1343364

Olubunmi Faleye (Contact Author)

Northeastern University - Finance Group ( email )

Boston, MA 02115
United States

Rani Hoitash

Bentley University - Department of Accountancy ( email )

175 Forest Street
Waltham, MA 02452-4705
United States

Udi Hoitash

Northeastern University - Accounting Group ( email )

360 Huntington Ave.
Boston, MA 02115
United States
671-373-5839 (Phone)

Register to save articles to
your library

Register

Paper statistics

Downloads
909
rank
23,207
Abstract Views
4,866
PlumX Metrics