Alignment or entrenchment: Which inside directors matter? Evidence from Taiwan

The main purpose of this paper is to examine the incentive alignment and entrenchment effects of inside directors by considering the property of inside directors. We confirm the constructive roles of inside directors and find a positive impact of the monitoring efficiency of inside directors and the monitoring mechanism provided by independent directors and institutional investors on the alignment effect. The result presents the influences of a default risk and a powerful CEO on the entrenchment effect. This study provides a better understanding of the nature of inside directors and, most particularly, is able to suggest an optimal structure of the board. After considering the alternative proxies, the subsample of an inside director dominating, additional interaction terms, and the endogeneity of inside directors in the robustness, the effect of an inside director remains the same and thus provides the robustness of our study.