Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/304263 
Year of Publication: 
2023
Citation: 
[Journal:] Cogent Economics & Finance [ISSN:] 2332-2039 [Volume:] 11 [Issue:] 2 [Article No.:] 2279871 [Year:] 2023 [Pages:] 1-13
Publisher: 
Taylor & Francis, Abingdon
Abstract: 
This study examines the interaction of conflicting preferences among directors, performance pay, and group effort. I model a corporate board in which directors voluntarily choose to research (or not research) an investment decision made by the board on behalf of the firm. Free-riding among directors creates a need for performance pay to motivate this costly research. The study shows that board diversity, modeled as heterogeneous personal preferences among directors over the chosen investment, can act as a substitute for costly performance pay and, in equilibrium, benefit the firm. This creates a direct financial incentive for firms to increase board diversity. The study then shows how the optimal level of diversity changes with board and firm characteristics and generates a set of testable empirical predictions.
Subjects: 
board diversity
board of directors
free-riding
heterogeneous preferences
voluntary effort
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article

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