Were Non-Independent Boards Really Captured Before SOX?

47 Pages Posted: 6 Jun 2017 Last revised: 16 Jul 2017

Date Written: July 3, 2017


Following SOX, exchanges mandated majority independent boards and defined independence such that some directors could reclassify from non-independent to independent. Because membership is unchanged, reclassifications make a board more independent legally, but not economically. I exploit the plausibly exogenous nature of reclassification eligibility to compare "treatment" firms that altered board membership to similar "placebo" firms that reclassified directors instead. Consistent with the view that boards are chosen optimally, placebo firms outperformed treatment firms by 3.7%. Furthermore, the mandate, which reduced firm specific knowledge as inside directors departed, also impacted investment choices: Treatment firms subsequently shifted away from intangible investments.

Keywords: Corporate Governance, Boards of Directors, SOX, Investment

JEL Classification: G34, G30, G3, G38, K2

Suggested Citation

Bowen III, Donald E., Were Non-Independent Boards Really Captured Before SOX? (July 3, 2017). Available at SSRN: https://ssrn.com/abstract=2979598 or http://dx.doi.org/10.2139/ssrn.2979598

Donald E. Bowen III (Contact Author)

Lehigh University ( email )

Bethlehem, PA 18015
United States

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