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The Externality in the CEO Market and Regulating Board Independence

39 Pages Posted: 10 Aug 2017 Last revised: 30 Aug 2017

Zhan Li

University of Winnipeg

Date Written: August 29, 2017

Abstract

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

Li, Zhan, The Externality in the CEO Market and Regulating Board Independence (August 29, 2017). Available at SSRN: https://ssrn.com/abstract=3014694

Zhan Li (Contact Author)

University of Winnipeg ( email )

Winnipeg, Manitoba R3B 2E9
United States

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