Optimal Board Strength and Project Initiation

초록

This paper identifies a tradeoff associated with board monitoring. A strong board with intense monitoring can increase the expected value of the firm because it reduces the likelihood of (ex-post) inferior projects being implemented. However, a strong board may decrease the expected value of the firm because it reduces the likelihood of (ex-ante) profitable projects being initiated by the firm’s manager. With the fear of dismissal, the manager is rather sitting on relatively safe status-quo projects than initiating risky but profitable projects. This tradeoff suggests the existence of optimal board strength that is unique to the firm’s operating environments and managerial characteristics.

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