Freedom of choice between unitary and two-tier boards: An empirical analysis

Abstract

We examine board structure in France, which since 1966 has allowed firms freedom to choose between unitary and two-tier boards. We analyze how this choice relates to characteristics of the firm and its environment. Firms with severe asymmetric information tend to opt for unitary boards; firms with a potential for private benefits extraction tend to adopt two-tier boards. There is enhanced sensitivity of CEO turnover to performance at firms with two-tier boards, indicating greater monitoring. Our results are broadly consistent with the Adams and Ferreira (2007) model and suggest there are gains from allowing freedom of contract about board structure. AbstractWe examine board structure in France, which since 1966 has allowed firms freedom to choose between unitary and two-tier boards. We analyze how this choice relates to characteristics of the firm and its environment. Firms with severe asymmetric information tend to opt for unitary boards; firms with a potential for private benefits extraction tend to adopt twotier boards. There is enhanced sensitivity of CEO turnover to performance at firms with two-tier boards, indicating greater monitoring. Our results are broadly consistent with the Adams and Ferreira (2007) model and suggest there are gains from allowing freedom of contract about board structure. Freedom of choice between unitary and two-tier boards: an empirical analysis

The Economic Impact of Forming a European Company

“…Belot et al . () hypothesized and found that the one‐tier board offers benefits in terms of mitigating information asymmetry problems, while a two‐tier board is more efficient for companies with high risks of managerial rent extractions, because this type of board limits discretion of management in the company. Given that both governance structures may have merits, we expected the value of firms to increase if this option becomes available to them, which we summarize in Hypothesis :Hypothesis (monism only/dualism only): Companies located in a country that allows only the one‐tier or two‐tier board structure under national corporate law will experience a positive abnormal return at the time when the first public information about the reincorporation leaks to the market .…”

“…As shown above, the SE regulation generally provides additional flexibility in corporate governance structures in some EU Member States. Belot et al (2014) hypothesized and found that the one-tier board offers benefits in terms of mitigating information asymmetry problems, while a two-tier board is more efficient for companies with high risks of managerial rent extractions, because this type of board limits discretion of management in the company. Given that both governance structures may have merits, we expected the value of firms to increase if this option becomes available to them, which we summarize in Hypothesis 1:…”

“…One‐tier boards (the primary structure used in the UK) tend to be used by firms prone to significant information asymmetries, while firms with two‐tier boards have higher risks of managerial rent extractions (Belot et al . ). These findings are consistent with the view that two‐tier boards provide better monitoring capabilities.…”

“…The two most important differences concern board structure and board-level worker representation. Both options affect the firm's value if they help to mitigate conflicts of interests between management and shareholders (Belot et al, 2014). In this article, we examine whether incorporating as an SE affects a firm's value and which factors drive these changes.…”

“…The second closely related study is one by Belot et al (2014). These authors assess the differential economic impact between one-tier and two-tier boards, using data on France where companies are free to contract on board structure.…”