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When are outside directors effective?

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Author Info

  • Duchin, Ran
  • Matsusaka, John G.
  • Ozbas, Oguzhan

Abstract

This paper uses recent regulations that have required some companies to increase the number of outside directors on their boards to generate estimates of the effect of board independence on performance that are largely free from endogeneity problems. Our main finding is that the effectiveness of outside directors depends on the cost of acquiring information about the firm: when the cost of acquiring information is low, performance increases when outsiders are added to the board, and when the cost of information is high, performance worsens when outsiders are added to the board. The estimates provide some of the cleanest estimates to date that board independence matters, and the finding that board effectiveness depends on information cost supports a nascent theoretical literature emphasizing information asymmetry. We also find that firms compose their boards as if they understand that outsider effectiveness varies with information costs.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 96 (2010)
Issue (Month): 2 (May)
Pages: 195-214

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Handle: RePEc:eee:jfinec:v:96:y:2010:i:2:p:195-214

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Web page: http://www.elsevier.com/locate/inca/505576

Related research

Keywords: Corporate governance Outside directors Information asymmetry Firm performance Board regulations;

References

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