Abstract

This paper provides a theoretical model to examine when and how boards of directors can utilize external experts or gatekeepers to assist them in 1) monitoring managers with career concerns, and 2) approving firm investments. I demonstrate how using gatekeepers to provide second opinions certifying management recommendations affects the disclosure incentives of management. Because certification serves as a signaling mechanism, when managers have the incentive to truthfully reveal all that they know, certification mandates are unnecessary since managers will choose to seek our second opinions on their own. When information disclosures cannot be easily verified, certification mandates can be counterproductive, elevating the status of costly second opinions that always agree with management recommendations. In the absence of incentives for truthful disclosure, it is better for boards to forego efforts to monitor and require management and gatekeepers to pool their recommendations

Disciplines

Corporation and Enterprise Law | Economics | Law and Economics | Organizations

Date of this Version

May 2009