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Ownership Concentration, Monitoring and Optimal Board Structure

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  • Clara Graziano
  • Annalisa Luporini

Abstract

The paper analyzes the optimal structure of the board of directors in a firm with a large shareholder sitting on the board. In a one-tier structure the sole board performs all tasks, while in a two-tier structure the management board is in charge of project selection and the supervisory board is in charge of monitoring. We consider the case in which the large shareholder sits on (and controls) the supervisory board but not on the management board. We show that such a two-tier structure can limit the interference of the large shareholder and can restore manager’s incentive to exert effort to become informed on new investment projects without reducing the large shareholder’s incentive to monitor the manager. This results in higher expected profits. The difference in profits can be sufficiently high to make the large shareholder prefer a two-tier board even if this implies that the manager selects his own preferred project. The paper has interesting policy implications since it suggests that two-tier boards can be a valuable option in Continental Europe where ownership structure is concentrated. It also offers support to some recent corporate governance reforms (like the so-called Vietti reform in Italy) that have introduced the possibility to choose between one-tier and two-tier structure of boards for listed firms.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2005/wp-cesifo-2005-09/cesifo1_wp1543.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1543.

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Date of creation: 2005
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Handle: RePEc:ces:ceswps:_1543

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Keywords: board of directors; dual board; corporate governance; monitoring; project choice;

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References

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  1. Renée B. Adams & Daniel Ferreira, 2007. "A Theory of Friendly Boards," Journal of Finance, American Finance Association, American Finance Association, vol. 62(1), pages 217-250, 02.
  2. David Hirshleifer & Anjan V. Thakor, 1998. "Corporate Control Through Board Dismissals and Takeovers," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 7(4), pages 489-520, December.
  3. Benjamin E. Hermalin & Michael S. Weisbach, 1996. "Endogenously Chosen Boards of Directors and Their Monitoring of the CEO," Working Papers, University of California at Berkeley, Haas School of Business _004, University of California at Berkeley, Haas School of Business.
  4. Benjamin E. Hermalin & Michael S. Weisbach, 2001. "Boards of Directors as an Endogenously Determined Institution: A Survey of the Economic Literature," NBER Working Papers 8161, National Bureau of Economic Research, Inc.
  5. Burkart, Mike & Gromb, Denis & Panunzi, Fausto, 1997. "Large Shareholders, Monitoring, and the Value of the Firm," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 112(3), pages 693-728, August.
  6. Brunello, Giorgio & Graziano, Clara & Parigi, Bruno, 2001. "Executive compensation and firm performance in Italy," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 19(1-2), pages 133-161, January.
  7. Clara Graziano & Annalisa Luporini, 2003. "Board Efficiency and Internal Corporate Control Mechanisms," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 12(4), pages 495-530, December.
  8. Villalonga, Belen & Amit, Raphael, 2006. "How do family ownership, control and management affect firm value?," Journal of Financial Economics, Elsevier, Elsevier, vol. 80(2), pages 385-417, May.
  9. Falk, Armin & Kosfeld, Michael, 2004. "Distrust – The Hidden Cost of Control," IZA Discussion Papers 1203, Institute for the Study of Labor (IZA).
  10. Clara Graziano & Annalisa Luporini, 2010. "Optimal Delegation when the Large Shareholder has Multiple Tasks," CESifo Working Paper Series 3028, CESifo Group Munich.
  11. Marianne Bertrand & Antoinette Schoar, 2006. "The Role of Family in Family Firms," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 20(2), pages 73-96, Spring.
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Cited by:
  1. Konrad, Kai A. & Skaperdas, Stergios, 2012. "The market for protection and the origin of the state," Munich Reprints in Economics, University of Munich, Department of Economics 13961, University of Munich, Department of Economics.
  2. Renee B. Adams & Benjamin E. Hermalin & Michael S. Weisbach, 2010. "The Role of Boards of Directors in Corporate Governance: A Conceptual Framework and Survey," Journal of Economic Literature, American Economic Association, vol. 48(1), pages 58-107, March.
  3. Belot, François & Ginglinger, Edith & Slovin, Myron B. & Sushka, Marie E., 2014. "Freedom of Choice between Unitary and Two-Tier Boards: An Empirical Analysis," Economics Papers from University Paris Dauphine, Paris Dauphine University 123456789/12816, Paris Dauphine University.
  4. Andreani, Ettore & Dummann, Kathrin & Neuberger, Doris, 2009. "Composition of supervisory boards in Germany: Inside or outside control of banks?," Thuenen-Series of Applied Economic Theory 103, University of Rostock, Institute of Economics.
  5. Belot, François & Ginglinger, Edith & Slovin, Myron B. & Sushka, Marie E., 2014. "Freedom of choice between unitary and two-tier boards: An empirical analysis," Journal of Financial Economics, Elsevier, Elsevier, vol. 112(3), pages 364-385.

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