Who Monitors the Monitor? The Effect of Board Independence on Executive Compensation and Firm Value
AbstractRecent corporate governance reforms focus on the board's independence and encourage equity ownership by directors. We analyze the efficacy of these reforms in a model in which both adverse selection and moral hazard exist at the level of the firm's management. Delegating governance to the board improves monitoring but creates another agency problem because directors themselves avoid effort and are dependent on the CEO. We show that as directors become less dependent on the CEO, their monitoring efficiency may decrease even as they improve the incentive efficiency of executive compensation contracts. Therefore, a board composed of directors that are more independent may actually perform worse. Moreover, higher equity incentives for the board may increase equity-based compensation awards to management. The Author 2008. Published by Oxford University Press on behalf of the Society for Financial Studies. All rights reserved. For permissions, please e-mail: firstname.lastname@example.org., Oxford University Press.
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Bibliographic InfoArticle provided by Society for Financial Studies in its journal The Review of Financial Studies.
Volume (Year): 21 (2008)
Issue (Month): 3 (May)
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- Cornelli, Francesca & Kominek, Zbigniew & Ljungqvist, Alexander P., 2009.
"Monitoring Managers: Does it Matter?,"
CEPR Discussion Papers
7571, C.E.P.R. Discussion Papers.
- Francesca Cornelli & Zbigniew Kominek & Alexander Ljungqvist, 2010. "Monitoring Managers: Does it Matter?," Working Papers 2010.30, Fondazione Eni Enrico Mattei.
- Francesca Cornelli & Zbigniew Kominek & Alexander Ljungqvist, 2010. "Monitoring managers: does it matter?," Working Papers 110, European Bank for Reconstruction and Development, Office of the Chief Economist.
- Wagner, Alexander F., 2011. "Board independence and competence," Journal of Financial Intermediation, Elsevier, vol. 20(1), pages 71-93, January.
- Chen, Chen-Wen & Liu, Victor W., 2013. "Corporate governance under asymmetric information: Theory and evidence," Economic Modelling, Elsevier, vol. 33(C), pages 280-291.
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