Morning Must-Read: Jacob Rose et al.: Will Disclosure of Friendship Ties Between Directors and CEOs Yield Perverse Effects?

Jacob Rose et al.: Will Disclosure of Friendship Ties Between Directors and CEOs Yield Perverse Effects?: “We conduct an experiment…

…involving 56 active and experienced corporate directors… and a second experiment with MBA students…. Friendship ties caused directors to be more willing to approve reductions to research and development (R&D) expenses… to meet the CEO’s minimum bonus target more often than when the directors and CEO were not friends. However, disclosing friendship ties resulted in even greater reductions in R&D expenses and higher CEO bonuses…. Friendship ties between the CEO and board members can impair the directors’ independence and objectivity, and… disclosure of the relationships can worsen this effect.