Advising the Management
41 Pages Posted: 25 Aug 2018 Last revised: 17 Sep 2018
Date Written: September 9, 2018
We study the optimal size and composition of an advisory committee when information is dispersed and informed parties differ in preferences and beliefs. If agents have similar objectives but disagree due to different beliefs, communication by committee members exhibits positive externalities, and the manager's expertise enhances the committee's advisory role. Conversely, if agents have conflicting preferences, communication externalities are negative, and managerial expertise impedes the advising effectiveness. The optimal advisory body includes all informed agents under heterogeneous beliefs, but a strict subset of informed agents under heterogeneous preferences. Thus, advisory shareholder voting (board) is optimal in the former (latter) case.
Keywords: advisory board, advisory voting, cheap talk, communication, heterogeneous beliefs, information aggregation
JEL Classification: D71, D74, D82, D83, G34
Suggested Citation: Suggested Citation