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 University

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 )

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Financial Research Network (FIRN)

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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 University ( email )

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Australia

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