The monitoring role of insiders

Conventional wisdom suggests that giving monitored agents an oversight role may blunt the effectiveness of the monitoring process. In contrast, I show that less independent boards can sometimes be more effective at monitoring. Fully independent boards have incentives to shirk monitoring ex post, aft...

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Bibliographic Details
Published in:Journal of accounting & economics 2007-12, Vol.44 (3), p.359-377
Main Author: Drymiotes, George
Format: Article
Language:English
Subjects:
Board of directors
Boards of directors
Commitment
Commitments
Corporate governance
Effectiveness
Incentives
Monitoring
Studies
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Summary:Conventional wisdom suggests that giving monitored agents an oversight role may blunt the effectiveness of the monitoring process. In contrast, I show that less independent boards can sometimes be more effective at monitoring. Fully independent boards have incentives to shirk monitoring ex post, after the agents’ productive inputs are sunk, if the boards cannot commit ex ante to monitoring. However, boards with inside directors may have incentives to monitor the agents ex post. The demand for insiders thus arises endogenously as they allow boards to indirectly commit to monitoring and thereby facilitate the monitoring process.
ISSN:0165-4101
1879-1980
DOI:10.1016/j.jacceco.2007.04.003