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The value of board commitment

Author

Listed:
  • Tim Baldenius

    (Columbia Business School)

  • Xiaojing Meng

    (NYU Stern School of Business)

  • Lin Qiu

    (University of Hong Kong)

Abstract

Boards can learn about the environment of their firms through information gathering and communicating with the CEO. In the post-Sarbanes-Oxley environment, some boards have taken steps to shape the communication more proactively by committing to decision rules, such as spending limits, before eliciting a report from the CEO. All else equal, such commitment power on the part of the board improves its communication with the CEO. However, taking into consideration the endogeneity of board composition/bias, we show that the board’s commitment power may in fact impede such communication, in equilibrium, by prompting the shareholders to appoint a more antagonistic board. We identify other cases where, in equilibrium, the board’s commitment power does foster communication, but ultimately reduces shareholder value, because the improved information flow dampens the board’s effort incentives. We discuss applications of our model to board staggering.

Suggested Citation

  • Tim Baldenius & Xiaojing Meng & Lin Qiu, 2021. "The value of board commitment," Review of Accounting Studies, Springer, vol. 26(4), pages 1587-1622, December.
    • Handle: RePEc:spr:reaccs:v:26:y:2021:i:4:d:10.1007_s11142-021-09586-9
    DOI: 10.1007/s11142-021-09586-9
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    More about this item

    Keywords

    Corporate governance; Board of Directors; Strategic communication;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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