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Journal of Finance Vol. 62 No. 1 2007

A Theory of Friendly Boards

Renée B. Adams1; Daniel Ferreira2,3,4,5

1 Federal Reserve · 2 Stockholm School of Economics · 3 Institute for Financial Research · 4 European Corporate Governance Institute · 5 Bank of England

open access

Abstract

We analyze the consequences of the board's dual role as advisor as well as monitor of management. Given this dual role, the CEO faces a trade‐off in disclosing information to the board: If he reveals his information, he receives better advice; however, an informed board will also monitor him more intensively. Since an independent board is a tougher monitor, the CEO may be reluctant to share information with it. Thus, management‐friendly boards can be optimal. Using the insights from the model, we analyze the differences between sole and dual board systems. We highlight several policy implications of our analysis.

DOI
10.1111/j.1540-6261.2007.01206.x
Volume
62
Issue
1
Pages
217-250
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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