Board Directors under CEO's Social Pressure: Misreporting, Misreading, and Dissent Risk

Using a parsimonious setup, we shed light on two channels through which a small amount of social pressure exerted by a CEO on board directors may increase the company value even in the absence of the classic tradeoff between the board's monitoring and advising tasks. First, the pressure reduces reporting bias that arises when the CEO's proposals submitted to the board are constrained by previously released public company reports (e.g., earnings reports). Second, the CEO's pressure increases the riskiness of directors' dissent, which motivates their information acquisition. If the pressure is sufficiently small, positive effects on reporting bias and information acquisition offset negative effects of having directors' decisions that are more biased. This setup provides novel implications regarding tolerance for a CEO's social ties especially in firms with high outsider monitoring costs, CEO-chairman duality, and differences between insiders and connected outsiders. We also propose testable empirical implications for links between board characteristics, executives' social networks, and earnings management.