It is widely believed that the ideal board in corporations is composed almost entirely of independent (outside) directors. In contrast, this paper shows that some lack of board independence can be in the interest of shareholders. This follows because a lack of board independence serves as a...

We consider a dynamic model featuring two firms that test a regulator’s enforcement propensity through their misconduct and a regulator that disciplines them to build a reputation for strict enforcement. We show that when the regulator has full discretion over the enforcement criterion, peer...