Working paper
Board groupthink
Nov 2014
Abstract
Corporate boards are comprised of individual directors but make decisions as a group. The quality of their decisions affects firm value. In this study, we focus on one particular aspect of group dynamics, groupthink. Groupthink is described as a mode of thinking by highly cohesive groups where the desire for consensus and agreement by the group members overrides critical thinking and correct judgment. While board groupthink has been criticized by both academic and practitioners, ours is the first study to undertake a systematic investigation of the effect of groupthink on firm value. We develop four proxies for groupthink, based on the idea that greater interaction among group members leads to greater group cohesiveness which in turn leads to greater groupthink. We hypothesize that (i) groupthink negatively affects firm value, and (ii) groupthink will have a more negative effect on firm value for firms in dynamic industries (industries that are rapidly growing, are highly innovative, are experiencing increase in competitive environment, or have high merger activity). While we do not find support for the first prediction, we do find results consistent with our second prediction. Our results have implications for the appropriate design of corporate boards.
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Details
- Title
- Board groupthink
- Creators
- Jeffrey L. Coles - University of UtahNaveen D Daniel - Drexel University, FinanceLalitha Naveen - Temple University
- Number of pages
- 34
- Resource Type
- Working paper
- Language
- English
- Academic Unit
- Finance
- Identifiers
- 991021906508904721