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Director Independence as Strategic Behavior

Listed author(s):
  • Alexander F. WAGNER

    (University of Zurich and Swiss Finance Institute)

This paper analyzes the independence of boards of directors as an optimally chosen, non-contractible behavior. A board behaves loyally to a CEO when it agrees to a negative NPV-project, giving the CEO private benefits. While the CEO benefits from competent directors because they help him make better decisions, the analysis reveals that loyalty is endogenously easier to obtain from a less competent board. The model implies that shareholders face a tradeoff between higher CEO pay and more inefficient board loyalty. It also holds predictions for how firm characteristics, other corporate governance features, and the business environment affect endogenous board competence.

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Paper provided by Swiss Finance Institute in its series Swiss Finance Institute Research Paper Series with number 07-17.

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Length: 39 pages
Date of creation: Apr 2007
Handle: RePEc:chf:rpseri:rp0717
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