Competition and Managerial Incentives: Board Independence, Information, and Predation
Rice University - Jesse H. Jones Graduate School of Business
University of South Florida - College of Business Administration
July 11, 2011
The Journal of Industrial Economics, Forthcoming
We show that the choice of an independent board serves as a commitment by management that it will abstain from ex post decisions that are not in shareholder interests. However, an independent board, relying on product market information to make or approve strategic decisions, also makes the firm more vulnerable to predatory information manipulation by its industry rivals. The optimal board type trades off the cost of the agency problem with that from predation. We show that only for weaker firms is an independent board the better choice, and for such firms, increased competition makes board independence even more beneficial.
Number of Pages in PDF File: 34
Date posted: September 27, 2011