Review of Finance Advance Access originally published online on October 17, 2007
Review of Finance 2008 12(1):93-140; doi:10.1093/rof/rfm027
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Board Structures Around the World: an Experimental Investigation*
1 Kennesaw State University and Federal Reserve Bank of Atlanta
2 Saïd Business School and Balliol College, University of Oxford
3 University of Texas at Dallas
We model and experimentally examine the board structure–performance relationship. We examine single-tiered boards, two-tiered boards, insider-controlled boards, and outsider-controlled boards. We find that even insider-controlled boards frequently adopt institutionally preferred rather than self-interested policies. Two-tiered boards adopt institutionally preferred policies more frequently but tend to destroy value by being too conservative, frequently rejecting good projects. Outsider-controlled single-tiered boards, both when they have multiple insiders and only a single insider, adopt institutionally preferred policies most frequently. In those board designs where the efficient Nash equilibrium produces strictly higher payoffs to all agents than the coalition-proof equilibria, agents tend to select the efficient Nash equilibria.
JEL Classification: G34, C72
* Much of the work on this paper was done while Gillette and Rebello were on the faculty of Georgia State University and Noe was on the faculty of Tulane University. We thank participants at the 2006 European meeting of the Econometric Society in Vienna, the 2005 WFA meetings in Portland, the FMA 2004 meetings in New Orleans, the ESA 2003 meetings in Pittsburgh, the Federal Reserve Bank of Atlanta Experimental Finance Conference, the ACLE/JFI Conference on the ownership of the modern corporation, and Stu Gillan and Mengxin Zhao for helpful comments. We also are grateful to Gwendolyn Pennywell and Qian Li for research assistance. Any errors are our own.