Abstract

http://ssrn.com/abstract=1026488
 
 

References (43)



 
 

Citations (63)



 


 



When Are Outside Directors Effective?


Ran Duchin


University of Washington - Michael G. Foster School of Business

John G. Matsusaka


University of Southern California - Marshall School of Business; USC Gould School of Law

Oguzhan Ozbas


University of Southern California - Marshall School of Business - Finance and Business Economics Department

September 28, 2009

Journal of Financial Economics (JFE), Forthcoming
USC CLEO Research Paper No. C07-13
Marshall School of Business Working Paper No. MKT 02-09

Abstract:     
This paper uses recent regulations that have required some companies to increase the number of outside directors on their boards to generate estimates of the effect of board independence on performance that are largely free from endogeneity problems. Our main finding is that the effectiveness of outside directors depends on the cost of acquiring information about the firm: when the cost of acquiring information is low, performance increases when outsiders are added to the board, and when the cost of information is high, performance worsens when outsiders are added to the board. The estimates provide some of the cleanest estimates to date that board independence matters, and the finding that board effectiveness depends on information cost supports a nascent theoretical literature emphasizing information asymmetry. We also find that firms compose their boards as if they understand that outsider effectiveness varies with information costs.

Number of Pages in PDF File: 61

JEL Classification: D23, G34, K22

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Date posted: March 26, 2008 ; Last revised: November 13, 2013

Suggested Citation

Duchin, Ran and Matsusaka, John G. and Ozbas, Oguzhan, When Are Outside Directors Effective? (September 28, 2009). Journal of Financial Economics (JFE), Forthcoming; USC CLEO Research Paper No. C07-13; Marshall School of Business Working Paper No. MKT 02-09. Available at SSRN: http://ssrn.com/abstract=1026488

Contact Information

Ran Duchin
University of Washington - Michael G. Foster School of Business ( email )
Box 353200
Seattle, WA 98195-3200
United States
John G. Matsusaka
University of Southern California - Marshall School of Business ( email )
Department of Finance & Business Economics
Los Angeles, CA 90089
United States
213-740-6495 (Phone)
213-740-6650 (Fax)

USC Gould School of Law
699 Exposition Boulevard
Los Angeles, CA 90089
United States
213-740-6495 (Phone)

Oguzhan Ozbas (Contact Author)
University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )
Marshall School of Business
Los Angeles, CA 90089
United States
213-740-0781 (Phone)
213-740-6650 (Fax)
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