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The Non-Correlation Between Board Independence and Long-Term Firm Performance

Sanjai Bhagat
University of Colorado at Boulder - Department of Finance

Bernard S. Black
University of Texas at Austin - School of Law; McCombs School of Business, University of Texas at Austin; European Corporate Governance Institute (ECGI); Northwestern University - School of Law; Northwestern University - Kellogg School of Management



As published in Journal of Corporation Law, Vol. 27, Pp. 231-273, 2002

Abstract:     
The boards of directors of American public companies are dominated by independent directors. Many commentators and institutional investors believe that a "monitoring board," composed almost entirely of independent directors, is an important component of good corporate governance. The empirical evidence reported in this Article challenges that conventional wisdom.

We conduct the first large-sample, long-horizon study of whether the degree of board independence (proxied by the fraction of independent directors minus the fraction of inside directors on a company's board) correlates with various measures of the long-term performance of large American firms. We find evidence that low-profitability firms increase the independence of their boards of directors. But there is no evidence that this strategy works. Firms with more independent boards do not perform better than other firms. Our results support efforts by firms to experiment with board structures that depart from the conventional monitoring board.

Note: This paper is identical to the article as published in the Journal of Corporation Law. The published article is available, without the Stanford Law and Economics cover page, at
http://papers.ssrn.com/abstract=313026

Note: This paper previously appeared in SSRN journals under the title "Do Independent Directors Matter?"

JEL Classifications: G34

Accepted Paper Series

Date posted: October 03, 1998 ; Last revised: August 06, 2002

Suggested Citation

Bhagat, Sanjai and Black, Bernard S., The Non-Correlation Between Board Independence and Long-Term Firm Performance. As published in Journal of Corporation Law, Vol. 27, Pp. 231-273, 2002. Available at SSRN: http://ssrn.com/abstract=133808 or doi:10.2139/ssrn.133808


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Contact Information

Sanjai Bhagat (Contact Author)
University of Colorado at Boulder - Department of Finance ( email )
Campus Box 419
Boulder, CO 80309
United States
303-492-7821 (Phone)
Bernard S. Black
University of Texas at Austin - School of Law ( email )
Austin, TX 78705
United States
512-471-4632 (Phone)
McCombs School of Business, University of Texas at Austin
Austin, TX 78712
United States
European Corporate Governance Institute (ECGI)
Brussels Belgium
Northwestern University - School of Law
375 E. Chicago Ave
Chicago, IL 60611
United States
Northwestern University - Kellogg School of Management
2001 Sheridan Road
Evanston, IL 60208
United States
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