The Complementary Roles of Board Incentives and Market Monitoring: Theory and Evidence

75 Pages Posted: 11 Feb 2016 Last revised: 1 Jul 2017

See all articles by Peter L. Swan

Peter L. Swan

University of New South Wales (UNSW Sydney; Financial Research Network (FIRN)

Multiple version iconThere are 4 versions of this paper

Date Written: October 20, 2016


In this paper I rectify the market governance model of Holmstrom and Tirole (1993) to develop and test a number of hypotheses concerning company board structure and incentives. Exogeneity stems from the forced departure of "non-independent" directors with substantial shareholdings from boards due to regulatory-induced pressure. Various market and accounting measures of performance, investment decision-making with respect to acquisitions, and negotiation and monitoring of CEO and non-executive director pay substantially worsen in the presence of this external market monitoring. I conclude that informed traders utilize information about the actions of board members that reinforce market-based incentives.

Keywords: Independent directors, Board monitoring, Governance through Trading, Board performance, Gray directors

JEL Classification: G34, J41, J44, L25

Suggested Citation

Swan, Peter Lawrence, The Complementary Roles of Board Incentives and Market Monitoring: Theory and Evidence (October 20, 2016). 2016 Financial Markets and Corporate Governance, Available at SSRN: or

Peter Lawrence Swan (Contact Author)

University of New South Wales (UNSW Sydney ( email )

School of Banking and Finance
UNSW Business School
Sydney NSW, NSW 2052
+61 2 9385 5871 (Phone)
+61 2 9385 6347 (Fax)

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Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane


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