A Theory of Corporate Boards and Forced CEO Turnover

Thomas J. Chemmanur · Viktar Fedaseyeu

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Corporate Finance and Governance Game Theory and Voting Systems Game Theory and Applications

Abstract

We model a corporate board evaluating a CEO of uncertain management ability. Each director receives a noisy private signal about CEO ability, after which directors discuss this ability and vote to retain or replace the CEO. Directors care about true CEO ability, since it affects their equity holding values; however, a CEO may impose costs of dissent on a director who votes to fire but fails to oust her. We relate the equilibrium CEO firing decision to board size, board composition, the effect of an imprecise public signal, and the cost and probability of finding a good replacement CEO.

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References

1996Higher market valuation of companies with a small board of directors 1982Strategic Information Transmission 1988Outside directors and CEO turnover 1985Dividend Policy under Asymmetric Information 2007Boards: Does one size fit all☆2007A Theory of Friendly Boards 1986Price and Advertising Signals of Product Quality 2007The determinants of board structure☆

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