Do Independent Directors Improve Firm Value? Evidence from the Great Recession
21 Pages Posted: 18 Oct 2017
Date Written: October 17, 2017
The literature offers no clear evidence on the effect of independent directors on firm value. We argue that, during stressful times, firms may need more and better expert advice to navigate a crisis. Outside independent directors can provide such advice. So, the role of independent directors may be more pronounced during a stressful time. Consistent with this notion, we find that independent directors significantly improved firm value during the Great Recession of 2008. Specifically, a rise in the percentage of independent directors by one standard deviation would have improved firm value by 4.29% during the Great Recession. Outside the crisis period, however, our results do not show that independent directors increase firm value. Further analysis confirms the results, including random-effects regressions, propensity score matching, instrumental-variable regressions, as well as falsification tests. Our results are crucial as they demonstrate that the role of independent directors is different during stressful times than it is during normal times.
Keywords: Independent Directors, Board Independence, Firm Value, Financial Crisis, Corporate Governance, Great Recession
JEL Classification: G32, G34
Suggested Citation: Suggested Citation