Are All Inside Directors the Same? Do They Entrench CEOs or Facilitate More Informed Board Decisions?

Abstract:     
Two existing theories of insiders on corporate boards posit opposing roles and shareholder wealth effects, while treating inside directors homogeneously. We differentiate inside directors holding outside directorships as more independent relative to other insiders and find they are more frequent when firm-specific information is important and CEOs are less influential. Firms with independent inside directors are associated with better operating performance and higher market-to-book ratios, especially when firm-specific information is highly important. Announcements of inside director appointments to outside boards exhibit shareholder wealth gains, while departure announcements trigger stock declines. Departures of other inside directors have no effect.

Keywords: board of directors, inside directors, independent directors, corporate governance, manager entrenchment

JEL Classifications: G34

Working Paper Series