The Interaction of Insiders and Outsiders in Monitoring: A Theory of Corporate Boards

53 Pages Posted: 19 Jan 2001

Date Written: August 2003

Abstract

I explicitly model the interaction of inside and outside corporate board members in a firm where the board is responsible for monitoring projects and making CEO succession decisions. Inside directors are better informed regarding the quality of firm investment projects proposed by the CEO. Outsiders can use CEO succession to motivate insiders to reveal their superior information. Board structure affects the flow of information and the effectiveness of the corporate board in replacing inferior projects with superior ones. I endogenously derive the optimal board size and composition by maximizing the board effectiveness in monitoring. I also develop testable implications for the cross-sectional differences in the optimal board structure across firms.

Keywords: Corporate boards, directors, inside directors, outsiders

JEL Classification: D21, D82, G34

Suggested Citation

Raheja, Charu G., The Interaction of Insiders and Outsiders in Monitoring: A Theory of Corporate Boards (August 2003). Available at SSRN: https://ssrn.com/abstract=251594 or http://dx.doi.org/10.2139/ssrn.251594

Charu G. Raheja (Contact Author)

Wake Forest University ( email )

P.O. Box 7659
Winston-Salem, NC 27109-7659
United States

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