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Ownership concentration, monitoring, and optimal board structure

  • Clara Graziano

    ()

    (University of Udine)

  • Annalisa Luporini

    ()

    (University of Florence)

We analyze the choice between a one-tier and a two-tier board structure in a firm with a large shareholder sitting on the board. The board has two tasks: project selection and monitoring the ability of the manager. In a one-tier structure, the sole board performs all tasks. In a two-tier structure, the management board is in charge of project selection and the supervisory board is in charge of monitoring. We show that such a two-tier structure can limit interference from the large shareholder and provide the manager with the incentive to exert effort to become informed on investment projects without reducing the large shareholder's incentive for monitoring. This results in higher expected profits. If the increase in profits is high enough, the large shareholder prefers a two-tier board even if this implies that the manager selects his own preferred project.

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Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 32 (2012)
Issue (Month): 4 ()
Pages: 3333-3346

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Handle: RePEc:ebl:ecbull:eb-12-00718
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  1. Brunello, Giorgio & Graziano, Clara & Parigi, Bruno, 2001. "Executive compensation and firm performance in Italy," International Journal of Industrial Organization, Elsevier, vol. 19(1-2), pages 133-161, January.
  2. Falk, Armin & Kosfeld, Michael, 2004. "Distrust - The Hidden Cost of Control," CEPR Discussion Papers 4512, C.E.P.R. Discussion Papers.
  3. Benjamin E. Hermalin & Michael S. Weisbach, 1996. "Endogenously Chosen Boards of Directors and Their Monitoring of the CEO," Microeconomics 9602001, EconWPA, revised 09 Oct 1996.
  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. Marianne Bertrand & Antoinette Schoar, 2006. "The Role of Family in Family Firms," Journal of Economic Perspectives, American Economic Association, vol. 20(2), pages 73-96, Spring.
  6. David Hirshleifer & Anjan V. Thakor, 1998. "Corporate Control Through Board Dismissals and Takeovers," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 7(4), pages 489-520, December.
  7. Clara Graziano & Annalisa Luporini, 2010. "Optimal Delegation when the Large Shareholder has Multiple Tasks," CESifo Working Paper Series 3028, CESifo Group Munich.
  8. Clara Graziano & Annalisa Luporini, 2003. "Board Efficiency and Internal Corporate Control Mechanisms," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 12(4), pages 495-530, December.
  9. Burkart, Mike & Gromb, Denis & Panunzi, Fausto, 1997. "Large Shareholders, Monitoring, and the Value of the Firm," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 693-728, August.
  10. Renée B. Adams & Daniel Ferreira, 2007. "A Theory of Friendly Boards," Journal of Finance, American Finance Association, vol. 62(1), pages 217-250, 02.
  11. Villalonga, Belen & Amit, Raphael, 2006. "How do family ownership, control and management affect firm value?," Journal of Financial Economics, Elsevier, vol. 80(2), pages 385-417, May.
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