This website uses cookies.

By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.

Boards

Paper Session

Sunday, Jan. 8, 2017 1:00 PM – 3:00 PM

Sheraton Grand Chicago, Chicago Ballroom VI
Hosted By: American Finance Association
  • Chair: Cesare Fracassi, University of Texas-Austin

Independent Directors and Corporate Litigation

James Malm
,
College of Charleston
Shawn Mobbs
,
University of Alabama

Abstract

In this paper, we examine the effects of board structure on a wide variety of corporate litigation. We use a unique hand-collected dataset of corporate lawsuits and the 2002 NYSE/NASDAQ exchange listing requirements, as an exogenous shock to board independence, to empirically examine the monitoring effectiveness of board independence using a difference-in-differences framework. We find that an increase in board independence is associated with a significant reduction in multiple types of corporate litigation, beyond securities lawsuits. This evidence is consistent with stronger monitoring by independent directors. However, we also find evidence that greater board independence can inhibit a board’s ability to monitor internal actions or favor shareholders over other stakeholders. Specifically, mandatory increases in board independence, which reduces a board’s knowledge of firm-specific information, makes a firm more susceptible to product liability, and labor litigation. Furthermore, in firms with higher debt levels, increasing board independence, with the intent to increase shareholder representation, is associated with an increase in financially related litigation. The evidence is consistent with the generally greater monitoring provided by independent directors, but it also reveals limitations to their monitoring as well as their reduced concern for other stakeholders. Finally, we find evidence that the appointment of female independent directors is one mechanism through which independent directors reduce litigation.

Performance-Based Turnover on Corporate Boards

Thomas Bates
,
Arizona State University
David Becher
,
Drexel University
Jared Wilson
,
Indiana University

Abstract

We document an economically significant relation between director turnover and prior firm performance. This relation manifests in idiosyncratic stock returns consistent with relative performance evaluation and the monitoring of actions attributable to directors. The director turnover-performance sensitivity increases substantially throughout the 2000s, and varies with a number of governance characteristics, most notably with the presence of an active external blockholder. Directors who exit firms following poor performance are significantly less likely to obtain new directorships in the future. In sum, the threat of replacement for poor firm performance is an increasingly significant incentive for the directors of public corporations.

Death by Committee? An Analysis of Delegation in Corporate Boards

Renee Adams
,
University of New South Wales
Vanitha Ragunathan
,
University of Queensland
Robert Tumarkin
,
University of New South Wales

Abstract

Did the corporate governance reforms of the early 2000s have unintended consequences? While readily observable board characteristics have not changed much over time, boards have increasingly delegated responsibilities to sub-committees staffed entirely by independent directors. Consistent with theoretical models on small group decision-making, we find evidence that delegation may have erected barriers to communication between inside and independent directors. Reform-induced delegation does not appear to be value- enhancing; average Tobin’s q decreases by 4.1% after the reforms. Sub-committees are relatively understudied, but our results suggest that ignoring them leads to an incomplete picture of corporate boards.

Board Diversity and Director Dissent in Corporate Boards

Seil Kim
,
New York University
Seungjoon Oh
,
Peking University

Abstract

While several studies examine how differences in director characteristics impact firm-level performance outcomes, there is limited evidence that heterogeneous boards affect firm value by offering diverse opinions. This is partly due to data availability on the process and outcome of board decisions. We utilize Korean data on individual director voting at board meetings to directly measure director dissent as evidence of diversity of opinion. We find that directors in heterogeneous boards are more likely to vote against management proposals and reject them. Firms that experience proposal rejection exhibit lower return volatility, consistent with independent directors restricting CEO influence. Firm value implications of director dissent and proposal rejection varies depending on firm complexity and industry dynamism. Our results suggest that board diversity, by increasing dissenting opinions and proposal rejections, affects firm performance.
Discussant(s)
John Core
,
Massachusetts Institute of Technology
David Yermack
,
New York University
Martijn Cremers
,
University of Notre Dame
Seoyoung Kim
,
Santa Clara University
JEL Classifications
  • G3 - Corporate Finance and Governance