Is Company Performance Dependent on Outside Director 'Skin in the Game'?

36 Pages Posted: 25 Jan 2011

See all articles by Peter L. Swan

Peter L. Swan

University of New South Wales (UNSW Sydney; Financial Research Network (FIRN)

Serkan Honeine

affiliation not provided to SSRN

Date Written: November 26, 2010


Whilst researchers extensively investigate executive incentives, very little appears in the literature on the effect of outside-director ‘skin in the game’ on board monitoring and thus firm performance. Utilizing a unique panel dataset, we observe a sizeable positive relationship between non-executive director ownership and firm performance. Companies with just one standard deviation greater non-executive director ownership, perform 28.2% better than the mean, as measured by Tobin’s Q. We also show that the effectiveness of monitoring improves as one reduces both board size and the proportion of outside directors. Greater skin in the game possessed by executive board members also improves firm performance over most but not all ownership ranges. We subject our results to a powerful event study: do investors recognize that outside and inside director skin in the game protects investors during a calamity, namely the Global Financial Crisis (GFC)? Yes, the relative stock price decline is far less for incentivized boards during the GFC, consistent with the panel data results utilizing Tobin’s Q. These results during a calamitous period have the added advantage of casting doubt on the reverse causality argument: directors of better performing firms have sufficient foresight to choose to hold more equity.

Keywords: Board monitoring, Incentive alignment, Independent director, Executive director, Firm performance

JEL Classification: G34, J41, J44, L25

Suggested Citation

Swan, Peter Lawrence and Honeine, Serkan, Is Company Performance Dependent on Outside Director 'Skin in the Game'? (November 26, 2010). Available at SSRN: or

Peter Lawrence Swan (Contact Author)

University of New South Wales (UNSW Sydney ( email )

School of Banking and Finance
UNSW Business School
Sydney NSW, NSW 2052
+61 2 9385 5871 (Phone)
+61 2 9385 6347 (Fax)

HOME PAGE: http://

Financial Research Network (FIRN)

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


Serkan Honeine

affiliation not provided to SSRN ( email )

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