How Do Independent Directors View Powerful CEOs? Evidence from a Quasi-Natural Experiment

Prior research shows that powerful CEOs can exacerbate the agency conflict, resulting in adverse corporate outcomes. Exploiting an exogenous shock introduced by the passage of the Sarbanes-Oxley Act, we explore whether board independence mitigates CEO power. Based on difference-in-difference estimation, our evidence shows that independent directors view powerful CEOs unfavorably. Board independence diminishes CEO power by more than a quarter. Based on a quasi-natural experiment, our research design is less vulnerable to the omitted-variable bias and reverse causality and therefore suggests that the effect of board independence on CEO power is likely causal.

Keywords: independent directors, independent boards, board independence, CEO power, powerful CEOs, Sarbanes-Oxley Act

JEL Classification: G30, G34

Suggested Citation: Suggested Citation

Jiraporn, Pornsit and Jumreonwong, Seksak and Jiraporn, Napatsorn and Singh, Simran, How Do Independent Directors View Powerful CEOs? Evidence from a Quasi-Natural Experiment (December 21, 2015). Available at SSRN: https://ssrn.com/abstract=2706344 or http://dx.doi.org/10.2139/ssrn.2706344