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Independent Directors and Firm Value: Evidence from an Emerging Market

37 Pages Posted: 28 Jun 2010  

Rajesh Chakrabarti

OP Jindal Global University; Wadhwani Foundation

Krishnamurthy Subramanian

Indian School of Business (ISB), Hyderabad

Frederick Tung

Boston University School of Law

Date Written: June 28, 2010


Do independent directors add value to emerging market firms? Using a natural experiment that provides exogenous changes in independent directors together with unique data on all director resignations, we find that the answer to this question is “Yes!” The natural experiment we exploit is provided by the recent Satyam fiasco in India. Following the disclosure of extensive accounting fraud by the promoter family in Satyam, several independent directors resigned from other Indian firms. Since these resignations were motivated by an unexpected shock external to the firm, they were unaffected by firm- and director-specific factors coinciding with the time of the resignation. Using the extraordinarily large number of such resignations in January 2009, we find the four-day cumulative abnormal return surrounding director resignations to be -1.3%. This effect is robust even after controlling for unobserved firm and director characteristics using fixed-effects and is also reflected in ex-post firm performance as measured by Tobin's Q. Consistent with the monitoring role of independent directors, we find that the effect is disproportionately greater for those independent directors that sit on the audit committee and possess business expertise; while the effect of being in the audit committee is greater for smaller firms, the effect of business expertise is felt more in large firms. Finally, the departing independent directors are missed less in family owned firms.

Keywords: Audit Committee, Board of Directors, Corporate Governance, Emerging Markets, Independent Directors

JEL Classification: G34

Suggested Citation

Chakrabarti, Rajesh and Subramanian, Krishnamurthy and Tung, Frederick, Independent Directors and Firm Value: Evidence from an Emerging Market (June 28, 2010). Available at SSRN: or

Rajesh Chakrabarti

OP Jindal Global University ( email )


Wadhwani Foundation ( email )

Subramanya Tech Park
EOIZ Industrial Area
Whitefield, Bengaluru 560066

Krishnamurthy Subramanian (Contact Author)

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019

Frederick Tung

Boston University School of Law ( email )

765 Commonwealth Avenue
Boston, MA 02215
United States

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