Ownership Concentration, Monitoring and Optimal Board Structure
The paper analyzes the optimal structure of board of directors in a firm with ownership concentrated in the hands of a large shareholder who sits on the board. We focus our attention on the choice between one-tier board who performs all tasks and two-tier board where the management board is in charge of project selection and the supervisory board is in charge of monitoring. We consider the case in which the large shareholder sits on (and controls) the supervisory board but not the management board. We show that a two-tier structure can limit the interference of large shareholders and can restore manager’s incentive to exert effort to become informed on new investment projects without reducing the large, shareholder’s incentive to monitor the manager. This results in higher expected profits in a two-tier board than in one-tier board and the difference in profits can be sufficiently high to induce large shareholders to prefer a two-tier board despite the fact that in this case the manager selects his preferred projects rather than the project preferred by large shareholders. The paper has interesting policy implications since it suggests that two-tier boards can be a valuable option in Continental Europe where ownership structure is concentrated. It also offers support to some recent corporate governance reforms, like the so-called Vietti reform in Italy, that have introduced the possibility to choose between one-tier and two-tier structure of boards for listed firms.
|Date of creation:||Jan 2005|
|Contact details of provider:|| Postal: Corso Magenta, 63 - 20123 Milan|
Web page: http://www.feem.it/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Armin Falk & Michael Kosfeld, "undated".
"Distrust - The Hidden Cost of Control,"
IEW - Working Papers
193, Institute for Empirical Research in Economics - University of Zurich.
- Falk, Armin & Kosfeld, Michael, 2004. "Distrust – The Hidden Cost of Control," IZA Discussion Papers 1203, Institute for the Study of Labor (IZA).
- Falk, Armin & Kosfeld, Michael, 2004. "Distrust - The Hidden Cost of Control," CEPR Discussion Papers 4512, C.E.P.R. Discussion Papers.
- Annalisa Luporini & Clara Graziano, 2010. "Optimal Delegation when the Large Shareholder has Multiple Tasks," Working Papers - Economics wp2010_05.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
- Clara Graziano & Annalisa Luporini, 2010. "Optimal Delegation when the Large Shareholder has Multiple Tasks," CESifo Working Paper Series 3028, CESifo Group Munich.
- 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.
- repec:hrv:faseco:30747162 is not listed on IDEAS
- Mike Burkart & Denis Gromb & Fausto Panunzi, 1997. "Large Shareholders, Monitoring, and the Value of the Firm," The Quarterly Journal of Economics, Oxford University Press, vol. 112(3), pages 693-728.
- Renée B. Adams & Daniel Ferreira, 2007. "A Theory of Friendly Boards," Journal of Finance, American Finance Association, vol. 62(1), pages 217-250, 02.
- 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.
- 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.
- 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.
- Hermalin, Benjamin E & Weisbach, Michael S, 1998. "Endogenously Chosen Boards of Directors and Their Monitoring of the CEO," American Economic Review, American Economic Association, vol. 88(1), pages 96-118, March.
- 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.
- 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.
- Benjamin E. Hermalin & Michael S. Weisbach, 2003. "Boards of directors as an endogenously determined institution: a survey of the economic literature," Economic Policy Review, Federal Reserve Bank of New York, issue Apr, pages 7-26.
- 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.
- 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. Full references (including those not matched with items on IDEAS)