Affiliation:
1. Department of Accounting, Stern School of Business, New York University, New York, New York 10012;
2. School of Accounting and Finance, University of Waterloo, Waterloo, Ontario N2L 3G1, Canada
Abstract
We investigate how board expertise affects chief executive officer (CEO) incentives and firm value. The CEO engages in a sequence of tasks: first acquiring information to evaluate a potential project, then reporting his or her assessment of the project to the board, and finally implementing the project if it is adopted. We demonstrate that the CEO receives higher compensation when the board agrees with the CEO on the assessment of the project. Board expertise leads to (weakly) better investment decisions and helps motivate the CEO's evaluation effort; however, it may induce underreporting and reduce the CEO's incentives to properly implement the project. Consequently, if motivating the CEO to evaluate projects is the major concern (e.g., innovative industries), board expertise exhibits an overall positive effect on firm value; however, if motivating the CEO to implement projects is the major concern (e.g., mature industries), board expertise can harm firm value. This paper was accepted by Shiva Rajgopal, accounting.
Publisher
Institute for Operations Research and the Management Sciences (INFORMS)
Subject
Management Science and Operations Research,Strategy and Management
Cited by
14 articles.
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