Inside Directors, Managerial Competition, and the Asymmetric Information Problem
30 Pages Posted: 1 Mar 2005 Last revised: 21 Apr 2014
Date Written: January 1, 2009
We posit that placing insiders on the board facilitates information flows to outside directors, mitigates the CEO's role as information gatekeeper, and allows managers to be more independent of the CEO. We find that inside directors are more prevalent in environments of greater information asymmetry. Further tests indicate that the percentage of insiders is associated with lower CEO pay, lower CEO influence, and higher use of accounting-based performance measures. However, these counterbalancing effects are diminishing in the number of insiders on the board. We conclude that insiders improve information flow to the board, foster managerial competition, and enhance board power.
Keywords: Internal Disclosure, Managerial Compensation, Accounting Performance, Analysts' Forecasts, Asymmetric Information
JEL Classification: M41, J33, K22
Suggested Citation: Suggested Citation