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Powerful independent directors

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  • Kathy Fogel
  • Liping Ma
  • Randall Morck

Abstract

Shareholder valuations are economically and statistically positively correlated with independent director power, gauged by a composite of social network power centrality measures. Powerful independent directors’ sudden deaths reduce shareholder value significantly; other independent directors’ deaths do not, consistent with powerful independent directors increasing firm valuations. Further tests associate more powerful independent directors with less value‐destroying mergers and acquisitions, less free cash flow retention, more CEO accountability, and less earnings management. We interpret these findings as more powerful independent directors better detecting and countering CEO missteps because of better access to information, greater credibility in challenging errant top managers, or both.

Suggested Citation

  • Kathy Fogel & Liping Ma & Randall Morck, 2021. "Powerful independent directors," Financial Management, Financial Management Association International, vol. 50(4), pages 935-983, December.
    • Handle: RePEc:bla:finmgt:v:50:y:2021:i:4:p:935-983
    DOI: 10.1111/fima.12365
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    More about this item

    JEL classification:

    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G3 - Financial Economics - - Corporate Finance and Governance
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification

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