Year: 2024
Type: article
Abstract: We identify a novel force behind the benefit of misaligned preferences in corporate governance. Our model entails a CEO who encounters a project and, after gathering information, decides whether to seek the approval of a corporate board. The CEO may be able to choose the properties of the collected information—this may happen if the project is “novel,” i.e., explores a new technology, business concept, or market and directors are less knowledgeable about it. We find that only sufficiently conservative and expansion-cautious directors can discipline the CEO’s empire-building tendency and opportunistic information collection. Such directors, however, underinvest in projects that are not novel. The board that maximizes firm value is either conservative or neutral (has interests aligned with the shareholders) and always overinvests in innovations. Boards with greater expertise are more likely to be conservative, but their bias is less severe. The board’s commitment power and bias are substitutes.
Source: Review of Accounting Studies
Authors: Martin Gregor, Beatrice Michaeli
Institutions: Charles University, University of California, Los Angeles
Language: English
Subfield: Accounting
Domain: Social Sciences
Open Access status: hybrid
Estimated APC paid: $2,990
OpenAlex ID: W4401615652