Are All Inside Directors the Same? Evidence from the External Directorship Market.
Ronald W. Masulis
University of New South Wales - Australian School of Business; European Corporate Governance Institute (ECGI); Financial Research Network (FIRN)
University of Alabama - Culverhouse College of Commerce and Business Administration
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
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.
Number of Pages in PDF File: 90
Keywords: board of directors, inside directors, independent directors, corporate governance, manager entrenchment
JEL Classification: G34, D23
Date posted: April 22, 2008 ; Last revised: September 4, 2012