Being Friendly Directors: Board Co-option and Labor Investment Efficiency

This study examines the effect of co-opted boards on labor investment efficiency in Chinese firms. Unlike other directors, co-opted directors are likely to have a good relationship with the incumbent CEO, who was involved in the initial selection of the board. We propose that friendly boards may be optimal for labor investment decisions because the CEO is motivated to share information and solicit input. Our results suggest that labor investment efficiency improves after an increase in co-option. The effect of co-option is more pronounced when the demand for advice is high, but less so when the demand for monitoring is high. This study suggests that co-opted boards may serve as better advisors to firms by having an unintended effect on managerial information hoarding.