The Externality in the CEO Market and Regulating Board Independence
39 Pages Posted: 10 Aug 2017 Last revised: 18 Dec 2017
Date Written: August 29, 2017
This paper discusses shareholder value and regulation on board independence. Shareholder value increases with a firm’s and, more importantly, other firms’ board independence. Shareholders set inefficiently low board independence because they fail to internalize the positive externality of higher board independence on other firms or they use low board independence to compete for CEO talent. This suggests that shareholder activism cannot substitute regulation. However, mandating minimum board independence can only remove the inefficiency caused by talent competition but not externality.
Keywords: Board Independence, Shareholder Value, Externality
JEL Classification: G34, J33, D82
Suggested Citation: Suggested Citation