Revealed Board Non-Independence

Abstract

Decades of research on corporate boards have wrestled with the issue that board composition is endogenously determined by the CEO and the board of directors and therefore relays incomplete information about board independence. This paper establishes that there exist circumstances under which CEO reveals the private information she has made a board non-independent and that her decision constitutes perfect Bayesian equilibria. Furthermore, the paper shows that the revelation is followed by a sharp decline in firm valuation and board monitoring quality. The results are stronger for firms in a poor information environment. Tests based on sudden director deaths suggest the evidence is causal.

Keywords: Sarbanes-Oxley Act, proxy advisor, board independence

JEL Classification: G34, G38, K22