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

Peter L. Swan

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

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.

Number of Pages in PDF File: 75

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

JEL Classification: G34, J41, J44, L25

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Date posted: October 1, 2016 ; Last revised: October 21, 2016

Suggested Citation

Swan, Peter L., The Complementary Roles of Board Incentives and Market Monitoring: Theory and Evidence (October 20, 2016). Available at SSRN: https://ssrn.com/abstract=2845926 or http://dx.doi.org/10.2139/ssrn.2845926

Contact Information

Peter Lawrence Swan (Contact Author)
University of New South Wales (UNSW Australia) ( email )
School of Banking and Finance
UNSW Business School
Sydney NSW, NSW 2052
+61 2 9385 5871 (Phone)
+61 2 9385 6347 (Fax)
HOME PAGE: http://https://www.business.unsw.edu.au/our-people/peterswan

Financial Research Network (FIRN)
C/- University of Queensland Business School
St Lucia, 4071 Brisbane
HOME PAGE: http://www.firn.org.au

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