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The efficiency view of corporate boards: theory and evidence

Author

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  • Angelo Baglioni

    ()

  • Luca Colombo

    () (DISCE, Università Cattolica)

Abstract

We build a simple model in which corporate governance may allow for institutions acting as commitment devices (e.g., the introduction of independent and minority members in the board). The model predicts that the incentive to adopt an institution — letting the general interest of shareholders prevail over private benefits of control by dominant shareholders — is decreasing in ownership concentration and increasing in free cash flow. We take the predictions of our theoretical model to the data, by providing empirical evidence on the board structure of Italian listed companies over the period 2004-2007. We find that board composition favors independent members in firms where the free cash flow is large, and executive members in firms with high ownership concentration and in family firms, supporting the view of corporate governance as a mechanism to control agency costs. More ambiguous conclusions are reached as for the link between governance and firm value, as the presence of minority lists in the board appears to improve value while that of independent members reduces performance.

Suggested Citation

  • Angelo Baglioni & Luca Colombo, 2010. "The efficiency view of corporate boards: theory and evidence," DISCE - Quaderni dell'Istituto di Economia e Finanza ief0096, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
  • Handle: RePEc:ctc:serie3:ief0096
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    File URL: http://www.unicatt.it/Istituti/EconomiaFinanza/Quaderni/ief0096.pdf
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    Cited by:

    1. Sandro Brusco & Luca Colombo & Umberto Galmarini, 2010. "Local Governments Tax Autonomy, Lobbying, and Welfare," Department of Economics Working Papers 10-01, Stony Brook University, Department of Economics.
    2. Isabel Acero & Nuria Alcalde, 2016. "Controlling shareholders and the composition of the board: special focus on family firms," Review of Managerial Science, Springer, vol. 10(1), pages 61-83, January.
    3. Mareva Sabatier, 2015. "A women's boom in the boardroom: effects on performance?," Applied Economics, Taylor & Francis Journals, vol. 47(26), pages 2717-2727, June.
    4. Isabel Acero & Nuria Alcalde, 2016. "Controlling shareholders and the composition of the board: special focus on family firms," Review of Managerial Science, Springer, vol. 10(1), pages 61-83, January.
    5. Giuseppe Mastromatteo, 2011. "H.P. Minsky And Policies To Countervail Crises," DISCE - Quaderni dell'Istituto di Economia e Finanza ief0102, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    6. Giuseppe Mastromatteo, 2011. "The Debate on the Crisis: Recent Reappraisals of the Concept of Functional Finance," DISCE - Quaderni dell'Istituto di Economia e Finanza ief0105, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    7. Acero Fraile, Isabel & Alcalde Fradejas, Nuria, 2014. "Ownership structure and board composition in a high ownership concentration context," European Management Journal, Elsevier, vol. 32(4), pages 646-657.

    More about this item

    Keywords

    corporate boards; agency problems; private benefits; firms’ performance.;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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