Voting in Corporate Boards with Heterogeneous Preferences

Paolo Balduzzi (), Clara Graziano and Annalisa Luporini ()
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Paolo Balduzzi: Università Cattolica Milano

Working Papers - Economics from Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa

Abstract: We analyze the voting behavior of a board of directors that has to approve (or reject) an investment proposal with uncertain return. We consider three types of directors: insiders, who are biased toward acceptance of the project, independent outsiders who want to maximize the firm's profit and independent outsiders who care about their reputation. We show that the presence of members with heterogeneous preferences can be beneficial and that the partisan behavior of insiders can be used as a sort of coordinating device by uninformed outsiders. Provided that the size of the board is optimal, there is no gain from increasing the number of outsiders above the strict majority despite the fact that each outsider is informed with positive probability. Substituting profit-maximizing directors with directors concerned about their reputation is not an obstacle to profit maximization provided that an appropriate sequential voting protocol is followed. We also show that a proper board composition makes communication between directors irrelevant in the sense that the same outcome is obtained with and without communication. Finally, as information is costly, our model provides some suggestions on the optimal size of boards.

Keywords: Board of directors; Voting; Corporate Governance (search for similar items in EconPapers)
JEL-codes: D71 G30 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2011
New Economics Papers: this item is included in nep-bec, nep-cdm and nep-cta
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Citations: View citations in EconPapers (1)

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