Are All Inside Directors the Same? Evidence from the External Directorship Market.

90 Pages Posted: 22 Apr 2008 Last revised: 4 Sep 2012

Ronald W. Masulis

University of New South Wales - Australian School of Business; European Corporate Governance Institute (ECGI); Financial Research Network (FIRN); National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER)

Shawn Mobbs

University of Alabama - Culverhouse College of Commerce and Business Administration

Date Written: October 12, 2010

Abstract

Agency theory and optimal contracting theory posit opposing roles and shareholder wealth effects for corporate inside directors. We evaluate these competing theories using the labor market for outside directorships to differentiate inside directors. Firms with inside directors holding outside directorships have better operating performance and market-to-book ratios, especially when board monitoring is more difficult. These boards make better acquisition decisions, have greater cash-holdings and overstate earnings less often. Announcements of outside board appointments improve shareholder wealth, while departure announcements reduce it, consistent with these inside directors improving board performance and outside directorships being an important source of inside director incentives.

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

JEL Classification: G34, D23

Suggested Citation

Masulis, Ronald W. and Mobbs, Shawn, Are All Inside Directors the Same? Evidence from the External Directorship Market. (October 12, 2010). Journal of Finance, Forthcoming; ECGI - Finance Working Paper No. 241/2009; 3rd Annual Conference on Empirical Legal Studies Papers; AFA 2009 San Francisco Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1108036 or http://dx.doi.org/10.2139/ssrn.1108036

Ronald W. Masulis (Contact Author)

University of New South Wales - Australian School of Business ( email )

Sydney, NSW 2052
Australia
612-9385-5860 (Phone)
612-9385-6347 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER) ( email )

BIZ 2 Storey 4, 04-05
1 Business Link
Singapore, 117592
Singapore

Shawn Mobbs

University of Alabama - Culverhouse College of Commerce and Business Administration ( email )

101 Paul W. Bryant Dr.
Box 870382
Tuscaloosa, AL 35487
United States

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