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Who's Monitoring the Monitor? Do Outside Directors Protect Shareholders' Interests?

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  • Eric Helland
  • Michael Sykuta

Abstract

The corporate governance literature is rich with empirical tests of the relation between board composition and firm performance. We consider the effect of board composition on a different measure of performance, the probability a firm will be sued by shareholders. We find firms that are defendants in securities litigation have higher proportions of insiders and of gray directors and have smaller boards than a matched group of firms that are not sued, even when controlling for firm value and industry. The results suggest that boards with higher proportions of outside directors do a better job of monitoring management.

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  • Eric Helland & Michael Sykuta, 2005. "Who's Monitoring the Monitor? Do Outside Directors Protect Shareholders' Interests?," The Financial Review, Eastern Finance Association, vol. 40(2), pages 155-172, May.
    • Handle: RePEc:bla:finrev:v:40:y:2005:i:2:p:155-172
    DOI: 10.1111/j.1540-6288.2005.00098.x
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    Cited by:

    1. Chongwoo Choe & Gloria Tian & Xiangkang Yin, 2008. "Managerial Power, Stock-Based Compensation, And Firm Performance: Theory And Evidence," Monash Economics Working Papers 21/08, Monash University, Department of Economics.
    2. Rachel E. Gordon, 2021. "Are outside director trades informative? Evidence from acquiring firms," International Review of Finance, International Review of Finance Ltd., vol. 21(2), pages 447-477, June.
    3. Dai, Lili & Fu, Renhui & Kang, Jun-Koo & Lee, Inmoo, 2016. "Corporate governance and the profitability of insider trading," Journal of Corporate Finance, Elsevier, vol. 40(C), pages 235-253.
    4. I Wayan Nuka Lantara, 2012. "The Use of Derivatives as a Risk Management Instrument: Evidence from Indonesian Non-Financial Firms," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 11(1), pages 45-62, June.
    5. Panagiotis Staikouras & Christos Staikouras & Maria-Eleni Agoraki, 2007. "The effect of board size and composition on European bank performance," European Journal of Law and Economics, Springer, vol. 23(1), pages 1-27, February.
    6. Lisa Fairchild & Joanne Li, 2005. "Director Quality and Firm Performance," The Financial Review, Eastern Finance Association, vol. 40(2), pages 257-279, May.
    7. Baum, Christopher F. & Bohn, James G. & Chakraborty, Atreya, 2016. "Securities fraud and corporate board turnover: New evidence from lawsuit outcomes," International Review of Law and Economics, Elsevier, vol. 48(C), pages 14-25.
    8. Narendra Bhana, 2016. "The Stock Market Reaction to Board Changes: The South African Experience," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 15(3), pages 269-294, December.
    9. Pascal Back & Oskar Colombo, 2022. "Shaping CEOs’ future focus through shareholder activism: the role of proposal characteristics," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 26(1), pages 255-286, March.
    10. Karin Jonnergård & Anna Stafsudd, 2011. "The making of active boards in Swedish public companies," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 15(1), pages 123-155, February.
    11. Shashank Bansal & M. Thenmozhi, 2019. "Does Board Composition Matter to Institutional Investors?," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 18(2_suppl), pages 238-266, August.
    12. Enalto de Oliveira Gondrige & Ademir Clemente & Márcia Maria dos Santos Bortolocci Espejo, 2012. "Composition of the board and firm value of brazilian public companies," Brazilian Business Review, Fucape Business School, vol. 9(3), pages 71-93, July.
    13. John A. Dove & Courtney A. Collins & Daniel J. Smith, 2018. "The impact of public pension board of trustee composition on state bond ratings," Economics of Governance, Springer, vol. 19(1), pages 51-73, February.
    14. Jesus Sáenz González & Emma García-Meca, 2014. "Does Corporate Governance Influence Earnings Management in Latin American Markets?," Journal of Business Ethics, Springer, vol. 121(3), pages 419-440, May.
    15. Crutchley, Claire E. & Minnick, Kristina, 2012. "Cash versus incentive compensation: Lawsuits and director pay," Journal of Business Research, Elsevier, vol. 65(7), pages 907-913.

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