This paper is a survey of the literature on boards of directors, with an emphasis on

Research in behavioral corporate finance takes two distinct approaches. The first emphasizes that investors are less than fully rational. It views managerial financing and investment decisions as rational responses to securities market mispricing. The second approach emphasizes that managers are less than fully rational. It studies the effect of nonstandard preferences and judgmental biases on managerial decisions. This survey reviews the theory, empirical challenges, and current evidence pertaining to each approach. Overall, the behavioral approaches help to explain a number of important financing and investment patterns. The survey closes with a list of open questions.

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We compare the trading performance of independent directors and other officers of the firm. We find that independent directors earn positive and substantial abnormal returns when they purchase their company stock, and that the difference with the same firm’s officers is relatively small at most horizons. The results are robust to controlling for firm fixed effects and to using a variety of alternative specifications. Executive officers and independent directors make higher returns in firms with the weakest governance and the gap between these two groups widens in such firms. Independent directors who sit on the audit committee earn higher return than other independent directors at the same firm. Finally, independent directors earn significantly higher returns than the market when they sell the company stock in a window before bad news and around earnings restatements.

Compensation, status, and press coverage of managers in the U.S. follow a highly skewed distribution: a small number of ‘superstars’ enjoy the bulk of the rewards. We evaluate the impact of CEOs achieving superstar status on the performance of their firms, using prestigious business awards to measure shocks to CEO status. We find that award-winning CEOs subsequently underperform, both relative to their prior performance and relative to a matched sample of non-winning CEOs. At the same time, they extract more compensation following the award, both in absolute amounts and relative to other top executives in their firms. They also spend more time on public and private activities outside their companies, such as assuming board seats or writing books. The incidence of earnings management increases after winning awards. The effects are strongest in firms with weak corporate governance. Our results suggest that the ex-post consequences of media-induced superstar status for shareholders are negative.

Corporate Finance meeting. We are also grateful to Ronald Masulis for sharing with us his data on acquirer returns. For financial support, we would like to thank the Guggenheim Foundation, the John M.

Evidence from Chinese banks

We develop and test the hypothesis that private information incorporated into stock prices affects the structure of corporate boards. Stock price informativeness may be a complement to board monitoring, because the information revealed by prices can be used by directors to monitor management. But price informativeness may also be a substitute for board monitoring, because more informative prices can trigger external monitoring mechanisms, such as takeovers. We develop a simple model in which these two effects interact and show under which conditions one effect dominates the other. We examine these issues empirically using a large panel of U.S. firms. We find robust evidence for the substitution effect: Stock price informativeness, as measured by the probability of informed trading (PIN), is negatively related to board independence. Consistent with the model’s predictions, this relationship is particularly strong for firms exposed to external governance mechanisms (firms with few takeover defenses) and internal governance mechanisms (firms with a high concentration of institutional ownership), and firms for which firm-specific knowledge is relatively unimportant (firms with low R&D expenses). We address endogeneity concerns in a number of different ways and conclude that our results are unlikely to be driven by omitted variables or reverse causality. The results are also robust to using different measures of price informativeness (such as firm-specific return variation and price impact) and different proxies for board monitoring (such as director attendance and the number of board meetings). JEL classification: G32, G34

Analytical models such as Aghion and Tirole (1997) distinguish formal authority from real authority: a manager could be formally responsible for a decision, but in reality may acquiesce to her subordinate. Organizational theorists (Simon 1997) suggest that human communication settings are best suited to uncover real authority. We use the extent to which CEOs speak in conference calls to measure their real authority over top management. Using a large database of firm conference call transcripts, we find that our real authority measure is distinct from the CEO’s formal authority measures, and is significantly associated with organizational factors as theoretically predicted. CEOs with real authority also receive higher wages. The joint tests of our measure of real authority with real authority theories and labor market theories suggest that real authority is a distinct organization feature that is measurable in large samples. ∗ We thank seminar participants at the University of Michigan for their comments and Paul Michaud for his significant assistance in programming and data management issues.

Abstract The Common Law, parliamentary democracy, and academia all insti-tutionalize dissent to check undue obedience to authority; and corporate governance reformers advocate the same in boardrooms. Many corporate governance disasters could be averted if directors asked hard questions, demanded clear answers, and blew whistles. Work by Milgram suggests humans have an innate predisposition to obey authority. This excessive subservience of agent to principal, here dubbed a ‘‘type II agency problem’’, explains directors ’ eerie submission. Rational explana-tions are reviewed, but behavioral explanations appear more complete. Experimental work shows this predisposition disrupted by dissenting peers, con-flicting authorities, and distant authorities. Thus, independent directors, chairs, and committees excluding CEOs might induce greater rationality and more considered ethics in corporate governance. Empirical evidence of this is scant—perhaps reflecting problems identifying genuinely independent directors.