Accepted by Raffi Indjejikian. I am deeply indebted to my dissertation chair Joel Demski for his guidance and encouragement. I am grateful for Florin Sabac, Pierre Jinghong Liang, Karl Hackenbrack, David Sappington and Haijin Lin for their helpful comments. I also thank the Editor and three anonymous reviewers for their suggestions. This paper also benefits from the workshop participants at University of Alberta, University of British Columbia, University of Florida and Carnegie Mellon University.
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Original Article
Board Monitoring and Endogenous Information Asymmetry*†
DOI: 10.1111/1911-3846.12022
© 2012 The Canadian Academic Accounting Association
Issue
Additional Information
- †
Publication History
- Accepted manuscript online: 29 NOV 2012 10:36AM EST
- Abstract
- Cited By
Keywords:
- Information asymmetry;
- Information acquisition;
- Board monitoring;
- Project decision
Abstract
Boards of directors are frequently criticized for their lack of monitoring in executive decision making. Increasing board effort to reduce information asymmetry between executives and shareholders is commonly viewed as desirable. This study challenges this common view by demonstrating that active monitoring can reduce the CEO's incentives to exert effort to acquire useful information for decision making. In particular, I model a CEO who has superior ability to acquire, process and interpret information relevant to investment decisions. I show that a board that actively solicits information from the CEO is beneficial only if the board is able to provide a sufficiently accurate evaluation of the information acquired by the CEO. If the board does not have the expertise to provide such an evaluation, it is better for the board to be passive and not interfere with the CEO's decisions. My findings highlight the subtleties in monitoring an expert and show that when the board does not have the expertise, information asymmetry is endogenously created to provide incentives for CEOs to make efficient investment decisions.