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Key Finding

AI adoption by the board mitigates some of the negative aspects of the CEO's AI use, but cannot restore efficient levels of board monitoring

Abstract

We analyze how the use of artificial intelligence affects the monitoring and advisory relationship between CEOs and corporate boards. AI can serve as an advisor to CEOs, partially substituting for board advice, and thus reducing CEOs' incentives to share information with directors. In equilibrium, firms respond by reducing board independence to restore information flows. Lower monitoring intensity decreases CEO turnover, making CEOs more entrenched. Lower dismissal risk allows firms to reduce CEO compensation. We show that AI adoption by the board mitigates some of the negative aspects of the CEO's AI use, but cannot restore efficient levels of board monitoring. Our analysis suggests that the adoption of AI in the boardroom may have unintended consequences for corporate governance.

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