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Corporate board composition, protocols, and voting behavior: experimental evidence

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  • Ann B. Gillette
  • Thomas H. Noe
  • Michael J. Rebello

Abstract

We model experimentally the governance of an institution. The optimal management of this institution depends on the information possessed by insiders. However, insiders, whose interests are not aligned with the interests of the institution, may choose to use their information to further personal rather than institutional ends. Researchers (e.g., Palfrey 1990) and the business press have both argued that multiagent mechanisms, which inject trustworthy but uninformed “watchdog” agents into the governance process and impose penalties for conflicting recommendations, can implement institutionally preferred outcomes. Our laboratory experiments strongly support this conclusion. In the experimental treatments in which watchdog agents were included, the intuitionally preferred allocation was implemented in the vast majority of cases. Surprisingly, implementation occurred even in the absence of penalties for conflicting recommendations.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 2000-10.

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Date of creation: 2000
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Handle: RePEc:fip:fedawp:2000-10

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Keywords: Corporations - Finance ; Game theory;

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References

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  1. Michael C. Jensen, 2010. "The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems," Journal of Applied Corporate Finance, Morgan Stanley, vol. 22(1), pages 43-58.
  2. Benjamin E. Hermalin & Michael S. Weisbach, 1996. "Endogenously Chosen Boards of Directors and Their Monitoring of the CEO," Working Papers _004, University of California at Berkeley, Haas School of Business.
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  5. Yermack, David, 1996. "Higher market valuation of companies with a small board of directors," Journal of Financial Economics, Elsevier, vol. 40(2), pages 185-211, February.
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  8. Milgrom, Paul & Roberts, John, 1996. "Coalition-Proofness and Correlation with Arbitrary Communication Possibilities," Games and Economic Behavior, Elsevier, vol. 17(1), pages 113-128, November.
  9. Bernheim, B. Douglas & Peleg, Bezalel & Whinston, Michael D., 1987. "Coalition-Proof Nash Equilibria I. Concepts," Journal of Economic Theory, Elsevier, vol. 42(1), pages 1-12, June.
  10. Joseph Farrell & Matthew Rabin, 1996. "Cheap Talk," Journal of Economic Perspectives, American Economic Association, vol. 10(3), pages 103-118, Summer.
  11. Anup Agrawal & Charles R. Knoeber, . "Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders (Revision of 29-94)," Rodney L. White Center for Financial Research Working Papers 8-96, Wharton School Rodney L. White Center for Financial Research.
  12. Eckel, Catherine & Holt, Charles A, 1989. "Strategic Voting in Agenda-Controlled Committee Experiments," American Economic Review, American Economic Association, vol. 79(4), pages 763-73, September.
  13. Sefton, Martin & Yavas, Abdullah, 1996. "Abreu-Matsushima Mechanisms: Experimental Evidence," Games and Economic Behavior, Elsevier, vol. 16(2), pages 280-302, October.
  14. Brickley, James A. & Coles, Jeffrey L. & Terry, Rory L., 1994. "Outside directors and the adoption of poison pills," Journal of Financial Economics, Elsevier, vol. 35(3), pages 371-390, June.
  15. Byrd, John W. & Hickman, Kent A., 1992. "Do outside directors monitor managers? *1: Evidence from tender offer bids," Journal of Financial Economics, Elsevier, vol. 32(2), pages 195-221, October.
  16. Warther, Vincent A., 1998. "Board effectiveness and board dissent: A model of the board's relationship to management and shareholders," Journal of Corporate Finance, Elsevier, vol. 4(1), pages 53-70, March.
  17. Isaac, R Mark & Walker, James M, 1988. "Communication and Free-Riding Behavior: The Voluntary Contribution Mechanism," Economic Inquiry, Western Economic Association International, vol. 26(4), pages 585-608, October.
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Citations

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Cited by:
  1. Rui Albuquerque & Jianjun Miao, 2006. "CEO Power, Compensation, and Governance," Boston University - Department of Economics - Working Papers Series WP2006-034, Boston University - Department of Economics.
  2. Fernando Lefort & Eduardo Walker, 2005. "The Effect of Corporate Governance Practices on Company Market Valuation and Payout Policy in Chile," Research Department Publications 3210, Inter-American Development Bank, Research Department.
  3. J. Atsu Amegashie & C. Bram Cadsby & Yang Song, 2005. "Competitive Burnout: Theory and Experimental Evidence," Working Papers 0507, University of Guelph, Department of Economics and Finance.
  4. Adams, Renee & Hermalin, Benjamin E. & Weisbach, Michael S., 2009. "The Role of Boards of Directors in Corporate Governance: A Conceptual Framework and Survey," Working Paper Series 2008-21, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  5. Lucian A. Bebchuk & Michael S. Weisbach, 2010. "The State of Corporate Governance Research," Review of Financial Studies, Society for Financial Studies, vol. 23(3), pages 939-961, March.
  6. Andrea Melis & Silvia Carta & Silvia Gaia, 2012. "Executive remuneration in blockholder-dominated firms. How do Italian firms use stock options?," Journal of Management and Governance, Springer, vol. 16(3), pages 511-541, August.
  7. Cheung, Yan-Leung & Chung, Cheong-Wing & Tan, Weiqiang & Wang, Wenming, 2013. "Connected board of directors: A blessing or a curse?," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 3227-3242.
  8. Fernando Lefort & Eduardo Walker, 2005. "El efecto de las prácticas de gobierno corporativo sobre la valuación de mercado y políticas de pago de compañías chilenas," Research Department Publications 3211, Inter-American Development Bank, Research Department.
  9. repec:cuf:journl:y:2013:v:14:i:1:n:2:albuquerque is not listed on IDEAS
  10. Audretsch, David B. & Hülsbeck, Marcel & Lehmann, Erik E., 2013. "Families as active monitors of firm performance," Journal of Family Business Strategy, Elsevier, vol. 4(2), pages 118-130.
  11. Ricardo Leal & André Carvalhal-da-Silva, 2005. "Conducción y valor empresarial en Brasil (y Chile)," Research Department Publications 3209, Inter-American Development Bank, Research Department.
  12. Thomas J. Chemmanur & Viktar Fedaseyeu, 2012. "A Theory of Corporate Boards and Forced CEO Turnover," Working Papers 444, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  13. Ricardo Leal & André Carvalhal-da-Silva, 2005. "Corporate Governance and Value in Brazil (and in Chile)," Research Department Publications 3208, Inter-American Development Bank, Research Department.
  14. Gillet, Joris & Schram, Arthur & Sonnemans, Joep, 2011. "Cartel formation and pricing: The effect of managerial decision-making rules," International Journal of Industrial Organization, Elsevier, vol. 29(1), pages 126-133, January.
  15. Ahmed, Anwer S. & Duellman, Scott, 2007. "Accounting conservatism and board of director characteristics: An empirical analysis," Journal of Accounting and Economics, Elsevier, vol. 43(2-3), pages 411-437, July.

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