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How valuable are independent directors? Evidence from external distractions

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  • Masulis, Ronald W.
  • Zhang, Emma Jincheng

Abstract

We provide new evidence on the value of independent directors by exploiting exogenous events that seriously distract independent directors. Approximately 20% of independent directors are significantly distracted in a typical year. They attend fewer meetings, trade less frequently in the firm's stock, and resign from the board more frequently, indicating declining firm-specific knowledge and a reduced board commitment. Firms with more preoccupied independent directors have declining firm valuation and operating performance and exhibit weaker merger and acquisition (M&A) profitability and accounting quality. These effects are stronger when distracted independent directors play key board monitoring roles and when firms require greater director attention.

Suggested Citation

  • Masulis, Ronald W. & Zhang, Emma Jincheng, 2019. "How valuable are independent directors? Evidence from external distractions," Journal of Financial Economics, Elsevier, vol. 132(3), pages 226-256.
    • Handle: RePEc:eee:jfinec:v:132:y:2019:i:3:p:226-256
    DOI: 10.1016/j.jfineco.2018.02.014
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    More about this item

    Keywords

    Independent directors; Director incentives; Director distraction; Corporate performance;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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