Thursday, November 24, 2011
Posted by D. Daniel Sokol
George Kanatas, Rice University - Jesse H. Jones Graduate School of Management and Jianping Qi, University of South Florida - College of Business Administration discuss Competition and Managerial Incentives: Board Independence, Information, and Predation.
ABSTRACT: We show that the choice of an independent board serves as a commitment by management that it will abstain from ex post decisions that are not in shareholder interests. However, an independent board, relying on product market information to make or approve strategic decisions, also makes the firm more vulnerable to predatory information manipulation by its industry rivals. The optimal board type trades off the cost of the agency problem with that from predation. We show that only for weaker firms is an independent board the better choice, and for such firms, increased competition makes board independence even more beneficial.