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Board bias, information, and investment efficiency

Author

Listed:
  • Martin Gregor

    (Charles University)

  • Beatrice Michaeli

    (UCLA Anderson School of Management)

Abstract

We identify a novel force behind the benefit of misaligned preferences in corporate governance. Our model entails a CEO who encounters a project and, after gathering information, decides whether to seek the approval of a corporate board. The CEO may be able to choose the properties of the collected information—this may happen if the project is “novel,” i.e., explores a new technology, business concept, or market and directors are less knowledgeable about it. We find that only sufficiently conservative and expansion-cautious directors can discipline the CEO’s empire-building tendency and opportunistic information collection. Such directors, however, underinvest in projects that are not novel. The board that maximizes firm value is either conservative or neutral (has interests aligned with the shareholders) and always overinvests in innovations. Boards with greater expertise are more likely to be conservative, but their bias is less severe. The board’s commitment power and bias are substitutes.

Suggested Citation

  • Martin Gregor & Beatrice Michaeli, 2025. "Board bias, information, and investment efficiency," Review of Accounting Studies, Springer, vol. 30(2), pages 1432-1462, June.
    • Handle: RePEc:spr:reaccs:v:30:y:2025:i:2:d:10.1007_s11142-024-09853-5
    DOI: 10.1007/s11142-024-09853-5
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    More about this item

    Keywords

    Empire-building; Biased board; Underinvestment; Overinvestment; Endogenous information;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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