Chapter 5: Corporate Executives, Directors, and Boards
Financial Behavior: Players, Services, Products, and Markets. H. Kent Baker, Greg Filbeck, and Victor Ricciardi, editors, 79-96, New York, NY: Oxford University Press, 2017.
Posted: 5 Jun 2017 Last revised: 6 Jun 2017
Date Written: June 1, 2017
Abstract
This chapter assesses the behavior of corporate managers and boards of directors within the framework of agency theory, stewardship theory, and psychological biases. In agency theory, a chief executive officer (CEO) is motivated to act in his or her own best interests rather than those of shareholders. Stewardship theory posits that a CEO is a self-actualizing individual seeking to grow and reach a higher level of achievement through leading an organization. A CEO exhibits self-interested behavior in managing the firm. The CEO also exhibits optimism, overconfidence, and risk-aversion behaviors that are not optimal for the company. In the context of agency theory, the board of directors should enact incentive structures and monitoring to control these behaviors. However, directors also suffer from self-interests and cognitive biases. Specifically, boards may suffer from group-dynamic problems such as social loafing, poor information sharing, and group-think.
Keywords: behavioral finance, behavioural finance, board of directors, chief executive officers, agency theory, stewardship theory, overconfidence, optimism, risk aversion, cognitive biases
JEL Classification: A12, D81, G00, G30, G10, M00, M10, M41
Suggested Citation: Suggested Citation