Board Monitoring and Advising in Dynamic Agency
European Accounting Review, Forthcoming
36 Pages Posted: 18 Feb 2021
Date Written: February 15, 2021
Intuition suggests that shareholders benefit from active boards. We present a model to show that if contract renegotiation is possible, then an active board might not always be desirable from the shareholders' perspective. This happens because low board activity may partially offset the distortion in the manager's incentives caused by the renegotiation option. While the value of low board activity stems from the board's weak monitoring, a strong measurement effect of the board's advising in the manager's performance measures is necessary to implement it. In this case, a sufficiently independent board motivates a low level of board activity.
Keywords: Corporate governance, Board monitoring, Board advising, Board composition, Managerial incentives
JEL Classification: D81, G34, M41
Suggested Citation: Suggested Citation