Powerful Independent Directors
61 Pages Posted: 11 Jan 2014 Last revised: 11 Sep 2015
Date Written: September 2, 2015
Shareholder valuations are economically and statistically positively correlated with independent directors’ power, gauged by social network power centrality. Powerful independent directors’ sudden deaths reduce shareholder value significantly; other independent directors’ deaths do not. More powerful independent directors Granger cause higher valuations; the converse is not true. Further tests associate more powerful independent directors with less value-destroying M&A, less free cash flow retention, more CEO accountability, and less earnings management. We posit that more powerful independent directors better detect and counter CEO missteps because of better access to information, greater credibility in challenging errant top managers, or both.
Keywords: Corporate Governance, Director Independence, Agency Problem, Social Networks, Power Centrality, Behavioral Finance
JEL Classification: G34, G38, G02, D85, K22, L2, M12, Z13
Suggested Citation: Suggested Citation