Abstract
ABSTRACT
We study a corporate board tasked with monitoring a firm's CEO and providing incrementally decision-relevant information. The board has both compensation and non-pecuniary incentives—we label the latter board bias. Friendly boards have muted information gathering incentives, but can more effectively engage in cheap talk communication with management. As a result, the direction of the optimal board bias is determined by the CEO's initial information advantage: the board should be weakly friendly if the CEO is endowed with precise information, and weakly antagonistic (to the CEO) otherwise. Aside from assembling a friendly board, another way for shareholders to foster CEO/board communication is by granting the CEO more equity. In general, we find board friendliness and CEO equity grants to be positively associated, in equilibrium. This provides an optimal contracting rationale for an empirical regularity often interpreted as friendly boards facilitating rent extraction.
Publisher
American Accounting Association
Subject
Economics and Econometrics,Finance,Accounting
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