Jeffrey L. Coles
Arizona State University (ASU) - Finance Department
Naveen D. Daniel
Drexel University - Department of Finance
September 10, 2013
Forthcoming, Review of Financial Studies
We argue that not all independent directors are equally effective in monitoring top management. Specifically, directors who are appointed by the CEO are likely to have stronger allegiance to the CEO and will be weaker monitors. To examine this hypothesis, we propose and empirically deploy two new measures of board composition. Co-option is the fraction of the board comprised of directors appointed after the sitting CEO assumed office. Consistent with Co-option serving to measure board capture, as Co-option increases board monitoring intensity decreases: turnover-performance sensitivity diminishes; pay level increases but without a commensurate increase in pay-performance sensitivity; and investment in hard assets increases. Further analysis suggests that even independent directors who are co-opted are less effective monitors. Non-Co-opted Independence –– the fraction of the board comprised of independent directors who were already on the board before the CEO assumed office –– has more explanatory power for monitoring effectiveness than the traditional measure of board independence.
Number of Pages in PDF File: 65
Keywords: Corporate Governance, Board Co-Option, CEO Entrenchment, Board Composition
JEL Classification: G32, G34, K22Accepted Paper Series
Date posted: October 29, 2010 ; Last revised: October 14, 2013
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