Are Interlocked Directors Effective Monitors?

49 Pages Posted: 17 Jan 2008

See all articles by Erik Devos

Erik Devos

University of Texas at El Paso - College of Business Administration - Department of Economics and Finance

Andrew K. Prevost

University of Vermont

John Puthenpurackal

University of Nevada, Las Vegas - Department of Finance

Date Written: January 15, 2008

Abstract

This paper comprehensively examines whether the presence of interlocked directors on a board is associated with weak governance. For a sample of 3,566 firm-years over the 2001-2003 time period, we find that firms with lower industry-adjusted firm performance are more likely to have interlocked directors. We also find a negative stock price reaction to the announcement of director appointments that create interlocked directors. Finally, we document that the presence of interlocked directors is associated with lower than optimal pay-performance sensitivity of CEO incentive compensation and reduced sensitivity of CEO turnover to firm performance. Collectively, our results suggest that the presence of interlocked directors is indicative of weak governance and entrenched managers.

Keywords: director interlocks, performance, board monitoring, social networks

JEL Classification: G30, G14, G18

Suggested Citation

Devos, Erik and Prevost, Andrew K. and Puthenpurackal, John, Are Interlocked Directors Effective Monitors? (January 15, 2008). Available at SSRN: https://ssrn.com/abstract=1084117 or http://dx.doi.org/10.2139/ssrn.1084117

Erik Devos

University of Texas at El Paso - College of Business Administration - Department of Economics and Finance ( email )

500 W. University Ave.
El Paso, TX 79968
United States
915 747 7770 (Phone)

HOME PAGE: http://utminers/utep.edu/hdevos

Andrew K. Prevost (Contact Author)

University of Vermont ( email )

Burlington, VT 05405
United States

John Puthenpurackal

University of Nevada, Las Vegas - Department of Finance ( email )

4505 S. Maryland Parkway
Box 456008
Las Vegas, NV 89154-6008
United States

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