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Hiring Cheerleaders: Board Appointments of "Independent" Directors

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Author Info
Lauren Cohen
Andrea Frazzini
Christopher Malloy

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Abstract

Using a unique, hand-collected database of independent directors, 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, micro-level data on their views regarding the firm prior to being appointed to the board: sell-side analysts who are subsequently appointed to the board 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 to 56.9% for all other analyst recommendations. We find that appointed analysts’ optimism is stronger at precisely those times when firms’ benefits are larger, and that appointing firms increase earnings management, and perform poorly, following these board appointments.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14232.

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Date of creation: Aug 2008
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Handle: RePEc:nbr:nberwo:14232

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Find related papers by JEL classification:
G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
J44 - Labor and Demographic Economics - - Particular Labor Markets - - - Professional Labor Markets and Occupations

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References listed on IDEAS
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  1. Renée Adams & Benjamin E. Hermalin & Michael S. Weisbach, 2008. "The Role of Boards of Directors in Corporate Governance: A Conceptual Framework and Survey," NBER Working Papers 14486, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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