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Board composition, CEO turnover and firm value: the effect of the Sarbanes-Oxley Act

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  • Mustafa A. Dah
  • Matthew Hurst

Abstract

This paper tests the effect of an exogenous shock, the Sarbanes-Oxley Act (SOX) of 2002, on the structure of corporate boards and their efficiency as a monitoring mechanism. The results suggest an increase in the participation of independent directors at the expense of insiders. Consequently, we investigate the implications of board composition changes on CEO turnover and firm value. We document a significant reduction in CEO turnover in the post-SOX period. We also demonstrate that, after SOX, a board dominated by independent directors is less likely to remove a CEO owing to poor performance. Finally, we highlight a negative association between the change in board composition and firm value. Contrary to the legislators' objectives, we suggest that the change in board structure brings about inefficient monitoring and promotes an unfavourable trade-off between independent directors and insiders.

Suggested Citation

  • Mustafa A. Dah & Matthew Hurst, 2016. "Board composition, CEO turnover and firm value: the effect of the Sarbanes-Oxley Act," International Journal of Financial Services Management, Inderscience Enterprises Ltd, vol. 8(3), pages 217-239.
  • Handle: RePEc:ids:ijfsmg:v:8:y:2016:i:3:p:217-239
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    Cited by:

    1. Shamsi S. Bawaneh, 2020. "Impact of Corporate Governance on Financial Institutions? Performance: A Board Composition Case," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 10(1), pages 54-63, January.

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