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Competition and Managerial Incentives: Board Independence, Information and Predation
Author(s) -
Kanatas George,
Qi Jianping
Publication year - 2012
Publication title -
the journal of industrial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.93
H-Index - 77
eISSN - 1467-6451
pISSN - 0022-1821
DOI - 10.1111/j.1467-6451.2012.00476.x
Subject(s) - independence (probability theory) , competition (biology) , incentive , shareholder , business , agency cost , agency (philosophy) , product (mathematics) , information asymmetry , principal–agent problem , industrial organization , microeconomics , economics , corporate governance , finance , philosophy , statistics , geometry , mathematics , biology , ecology , epistemology
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.