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RFS Advance Access published online on July 20, 2006
Review of Financial Studies, doi:10.1093/rfs/hhl030
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© The Author 2006. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org

Article

A Theory of Board Control and Size

Milton Harris 1 * and Artur Raviv 2
1 Graduate School of Business, 5807 S. Woodlawn Avenue, Chicago
2 Northwestern University

* To whom correspondence should be addressed.
Milton Harris, E-mail: milt{at}uchicago.edu


  Abstract

This paper presents a model of optimal control of corporate boards of directors. We determine when one would expect inside versus outside directors to control the board, when the controlling party will delegate decision-making to the other party, the extent of communication between the parties, and the number of outside directors. We show that shareholders can sometimes be better off with an insider-controlled board. We derive endogenous relationships among profits, board control, and the number of outside directors that call into question the usual interpretation of some documented empirical regularities.


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