Board efficiency and internal corporate control mechanisms

We analyze the interactions between internal and external control mechanisms in a framework in which the board selects the CEO and then decides whether to retain or dismiss him after observing a siganl regarding his ability. The novel aspect of our paper is that we consider both the hiring and the firing of the CEO by the board. The type of the board is defined by its ability to select a good CEO, so that the quality of the CEO depends on the type of the board. The the dismissal-retention decision provides information on only on the quality of the CEO but also on the board's type. We show that the board's behavior depends on the pressure from the takeover market and on whether its type is publicly known.