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Endogenously Chosen Boards of Directors and Their Monitoring of the CEO

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Author Info
Benjamin Hermalin (UC Berkeley, Haas School of Business)

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Abstract

This paper develops a model in which the effectiveness of a board's monitoring of the CEO depends on the board's independence. The independence of new directors is determined through negotiations (implicit or explicit) between the existing directors and the CEO. The CEO's bargaining position, and thus influence over the board-selection process, depends on an updated estimate of the CEO's ability based on prior performance. Many empirical findings about board structure and performance arise as equilibrium phenomena in this model. We also explore the implications of this model for proposed regulations of corporate governance structures. Please contact the Program in Law and Economics at Boalt Hall School of Law, UC Berkeley, Berkeley, CA 94720 for a copy of this paper.

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Publisher Info
Paper provided by Berkeley Olin Program in Law & Economics in its series Berkeley Olin Program in Law & Economics, Working Paper Series with number 1157.

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Date of creation: 03 May 1995
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Handle: RePEc:cdl:oplwec:1157

Note: oai:cdlib1:blewp-1157
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Postal: Boalt Hall, Berkeley, CA 94720
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