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Hiring Cheerleaders: Board Appointments of "Independent" Directors

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Author Info

  • Lauren Cohen

    ()
    (Harvard Business School, Harvard University, Boston, Massachusetts 02163)

  • Andrea Frazzini

    ()
    (AQR Capital Management, Greenwich, Connecticut 06830)

  • Christopher J. Malloy

    ()
    (Harvard Business School, Harvard University, Boston, Massachusetts 02163)

Abstract

We provide evidence that firms appoint independent directors who are overly sympathetic to management, while still technically independent according to regulatory definitions. We explore a subset of independent directors for whom we have detailed, microlevel data on their views regarding the firm prior to being appointed to the board: sell-side analysts who are subsequently appointed to the boards of companies they previously covered. We find that boards appoint overly optimistic analysts who are also poor relative performers. The magnitude of the optimistic bias is large: 82.0% of appointed recommendations are strong buy/buy recommendations, compared with 56.9% for all other analyst recommendations. We also show that appointed analysts' optimism is stronger at precisely those times when firms' benefits are larger. Last, we find that appointing firms are more likely to have management on the board nominating committee, appear to be poorly governed, and increase earnings management and chief executive officer compensation following these board appointments. This paper was accepted by Brad Barber, finance.

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Bibliographic Info

Article provided by INFORMS in its journal Management Science.

Volume (Year): 58 (2012)
Issue (Month): 6 (June)
Pages: 1039-1058

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Handle: RePEc:inm:ormnsc:v:58:y:2012:i:6:p:1039-1058

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Keywords: independent directors; appointments; analysts; board members;

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References

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Citations

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Cited by:
  1. Markus Glaser & Florencio Lopez-De-Silanes & Zacharias Sautner, 2013. "Opening the Black Box: Internal Capital Markets and Managerial Power," Journal of Finance, American Finance Association, vol. 68(4), pages 1577-1631, 08.
  2. Renee B. Adams & Benjamin E. Hermalin & Michael S. Weisbach, 2010. "The Role of Boards of Directors in Corporate Governance: A Conceptual Framework and Survey," Journal of Economic Literature, American Economic Association, vol. 48(1), pages 58-107, March.
  3. Pablo Ruiz-Verdú & Ravi Singh, 2014. "Board Independence, CEO Pay, and Camouflaged Compensation," Business Economics Working Papers wb140704, Universidad Carlos III, Departamento de Economía de la Empresa.
  4. Xia, Han, 2014. "Can investor-paid credit rating agencies improve the information quality of issuer-paid rating agencies?," Journal of Financial Economics, Elsevier, vol. 111(2), pages 450-468.
  5. Roberto E. Wessels & Tom J. Wansbeek, 2014. "What is the Relation (if any) Between a Firm's Corporate Governance Arrangements and its Financial Performance?," CESifo Working Paper Series 4599, CESifo Group Munich.

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