| Firms require the use of corporate governance structures. However, many questions remain unanswered with respect to how they work, why they work, what they do, and how they get created. The literature remains fragmented and disparate in its treatment of these questions. The following dissertation attempts to bring some continuity and cohesion to the field.; Chapter 1 models the construction of the board of directors of a firm. Management, with an informational advantage concerning the state of the world, uses the composition of the board (insiders vs. outsiders) as a signal to owners, helping to reduce uncertainty. This allows owners to supply capital to the firm, even when they cannot contract with, or otherwise construct incentives for, the managers.; Chapter 2 empirically tests one of the main implications stemming from Chapter 1. Does the composition of the board of directors change with the concentration of ownership? Evidence supports this hypothesis. Additionally, the analysis supports a story where owners receive assurances that the management will not shirk on the job when owners cannot monitor due to collective action problems. By constructing a board that can monitor in place of the owners, the management self-commits to a path of efficiency enhancing actions.; Chapter 3 examines the incentives that board members have to do their jobs. Arguments exist both for and against tying the incentives of the board members closer to shareholders' objectives. I test these two conflicting hypotheses and find that the closer the board members' incentives align with the shareholders' goals, the worse the firm does. By aligning incentives too closely, it appears that distortions are introduced, leading to worse performances in the marketplace.; In these chapters I hope to have shed some light on a key governance device of the firm: the board of directors. I have provided theories and evidence concerning why the board is created, what purpose(s) it might serve, how they are created, and why the board functions in the manner it does. This helps to understand the internal functioning of the firm, a subject of great importance and one not fully explored in the past. |
