Hiring Cheerleaders: Board Appointments of "Independent" Directors

46 Pages Posted: 18 Aug 2008 Last revised: 14 Apr 2010

Lauren Cohen

Harvard Business School; National Bureau of Economic Research (NBER)

Andrea Frazzini

AQR Capital Management, LLC

Christopher J. Malloy

Harvard Business School; National Bureau of Economic Research (NBER)

Date Written: August 2008

Abstract

We provide evidence that firms appoint independent directors who are overly sympathetic to management, while still technically independent according to regulatory definitions. We explore a subset of independent directors for whom we have detailed, micro-level data on their views regarding the firm prior to being appointed to the board: sell-side analysts who are subsequently appointed to the board of companies they previously covered. We find that boards appoint overly optimistic analysts who are also poor relative performers. The magnitude of the optimistic bias is large: 82.0% of appointed recommendations are strong-buy/buy recommendations, compared to 56.9% for all other analyst recommendations. We find that appointed analysts' optimism is stronger at precisely those times when firms' benefits are larger, and that appointing firms increase earnings management, and perform poorly, following these board appointments.

Suggested Citation

Cohen, Lauren and Frazzini, Andrea and Malloy, Christopher J., Hiring Cheerleaders: Board Appointments of "Independent" Directors (August 2008). NBER Working Paper No. w14232. Available at SSRN: https://ssrn.com/abstract=1230856

Lauren Cohen (Contact Author)

Harvard Business School ( email )

Rock Center 321
Soldiers Field
Boston, MA 02163
United States

HOME PAGE: http://www.people.hbs.edu/lcohen

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Andrea Frazzini

AQR Capital Management, LLC ( email )

Two Greenwich Plaza, 3rd Floor
Greenwich, CT 06830
United States
203-742-3894 (Phone)
203-742-3394 (Fax)

HOME PAGE: http://www.econ.yale.edu/~af227/

Christopher J. Malloy

Harvard Business School ( email )

Soldiers Field Road
Baker Library 277
Boston, MA 02163
United States
617-495-4383 (Phone)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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