Board bias, information, and investment efficiency

Martin Gregor () and Beatrice Michaeli ()
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Martin Gregor: Charles University
Beatrice Michaeli: UCLA Anderson School of Management

Review of Accounting Studies, 2025, vol. 30, issue 2, No 11, 1432-1462

Abstract: Abstract We identify a novel force behind the benefit of misaligned preferences in corporate governance. Our model entails a CEO who encounters a project and, after gathering information, decides whether to seek the approval of a corporate board. The CEO may be able to choose the properties of the collected information—this may happen if the project is “novel,” i.e., explores a new technology, business concept, or market and directors are less knowledgeable about it. We find that only sufficiently conservative and expansion-cautious directors can discipline the CEO’s empire-building tendency and opportunistic information collection. Such directors, however, underinvest in projects that are not novel. The board that maximizes firm value is either conservative or neutral (has interests aligned with the shareholders) and always overinvests in innovations. Boards with greater expertise are more likely to be conservative, but their bias is less severe. The board’s commitment power and bias are substitutes.

Keywords: Empire-building; Biased board; Underinvestment; Overinvestment; Endogenous information (search for similar items in EconPapers)
JEL-codes: D83 G31 G34 M41 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s11142-024-09853-5

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