How Valuable are Independent Directors? Evidence from External Distractions

74 Pages Posted: 2 Aug 2016 Last revised: 30 Sep 2018

See all articles by Ronald W. Masulis

Ronald W. Masulis

University of New South Wales, Sydney; European Corporate Governance Institute (ECGI); Financial Research Network (FIRN); National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER)

Emma Jincheng Zhang

Monash Business School; University of New South Wales - Australian School of Business

Date Written: May 5, 2018

Abstract

We provide new evidence on the value of independent directors by exploiting exogenous events that seriously distract independent directors. Approximately 20% of independent directors are significantly distracted in a typical year. They attend fewer meetings, trade less frequently in the firm’s stock and resign from the board more frequently, indicating declining firm-specific knowledge and a reduced board commitment. Firms with more preoccupied independent directors have declining firm valuation and operating performance and exhibit weaker M&A profitability and accounting quality. These effects are stronger when distracted independent directors play key board monitoring roles and when firms require greater director attention.

Keywords: Independent Directors, Director Incentives, Director Distraction, Corporate Performance

JEL Classification: G30, G34

Suggested Citation

Masulis, Ronald W. and Zhang, Emma Jincheng, How Valuable are Independent Directors? Evidence from External Distractions (May 5, 2018). Journal of Financial Economics (JFE), Forthcoming; European Corporate Governance Institute (ECGI) - Finance Working Paper No. 522/2017; 9th Conference on Financial Markets and Corporate Governance (FMCG) 2018. Available at SSRN: https://ssrn.com/abstract=2816470 or http://dx.doi.org/10.2139/ssrn.2816470

Ronald W. Masulis (Contact Author)

University of New South Wales, Sydney ( email )

UNSW Business School
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European Corporate Governance Institute (ECGI) ( email )

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Financial Research Network (FIRN)

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Australia

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National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER) ( email )

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Emma Jincheng Zhang

Monash Business School ( email )

Wellington Road
Clayton, Victoria 3168
Australia

University of New South Wales - Australian School of Business ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

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