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Authority, Consensus, and Governance

Author

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  • Archishman Chakraborty
  • Bilge Yılmaz

Abstract

Management-aligned boards exchange precise information with management and make efficient decisions. But when agency conflicts are important, management-aligned boards may not maximize shareholder value. Even if management controls all decisions and the board only provides advice, optimal boards may withhold information. This creates inefficiencies. But agency costs fall because management is induced to obey the board. When the board can directly veto management proposals, shareholders are better off. Optimal boards should then be more shareholder-aligned. Shareholder value is further enhanced if shareholders can veto management and also commit to revealing the board’s information. Optimal boards should then be perfectly shareholder-aligned. Received September 26, 2015; editorial decision December 18, 2016 by Editor Andrew Karolyi.

Suggested Citation

  • Archishman Chakraborty & Bilge Yılmaz, 2017. "Authority, Consensus, and Governance," The Review of Financial Studies, Society for Financial Studies, vol. 30(12), pages 4267-4316.
    • Handle: RePEc:oup:rfinst:v:30:y:2017:i:12:p:4267-4316.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhx068
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    Cited by:

    1. Tim Baldenius & Xiaojing Meng & Lin Qiu, 2021. "The value of board commitment," Review of Accounting Studies, Springer, vol. 26(4), pages 1587-1622, December.
    2. Leitner, Yaron & Yilmaz, Bilge, 2019. "Regulating a model," Journal of Financial Economics, Elsevier, vol. 131(2), pages 251-268.
    3. Antić, Nemanja & Persico, Nicola, 2023. "Equilibrium selection through forward induction in cheap talk games," Games and Economic Behavior, Elsevier, vol. 138(C), pages 299-310.
    4. Guthrie, Graeme, 2021. "A dynamic model of managerial entrenchment and the positive incentives it creates," Journal of Economic Dynamics and Control, Elsevier, vol. 123(C).
    5. Yaron Leitner & Basil Williams, 2023. "Model Secrecy and Stress Tests," Journal of Finance, American Finance Association, vol. 78(2), pages 1055-1095, April.
    6. Sáenz-Royo, Carlos & Lozano-Rojo, Álvaro, 2023. "Authoritarianism versus participation in innovation decisions," Technovation, Elsevier, vol. 124(C).

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