Board Independence and CEO Turnover

35 Pages Posted: 29 Apr 2005

See all articles by Volker Laux

Volker Laux

University of Texas at Austin - McCombs School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: December 2006

Abstract

This paper analyzes how board independence affects the CEO's ability to extract rents from the firm. The CEO is assumed to possess private information about his ability, which the board needs in order to decide whether to replace him. If the board is more active in removing low quality CEOs, the incumbent is better able to use his information advantage to extract rents. Since the board cannot commit not to renegotiate the contract, a board that is fully independent from the CEO is more active than is efficient ex ante. For this reason, shareholders are better off if the board of directors lacks some independence. The model predicts that a trend toward greater board independence is associated with subsequent trends toward higher CEO turnover, more generous severance packages, and larger stock option grants.

Keywords: Corporate Governance, Board Independence, Severance Pay, CEO Turnover, Incentive Compensation, Renegotiation

JEL Classification: G34

Suggested Citation

Laux, Volker, Board Independence and CEO Turnover (December 2006). Available at SSRN: https://ssrn.com/abstract=712022 or http://dx.doi.org/10.2139/ssrn.712022

Volker Laux (Contact Author)

University of Texas at Austin - McCombs School of Business ( email )

2317 Speedway
Austin, TX Texas 78712
United States

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