Black Directors: Sarbanes-Oxley and Hidden Board Independence

71 Pages Posted: 9 Feb 2018 Last revised: 10 Nov 2019

See all articles by Sunwoo Hwang

Sunwoo Hwang

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School

Date Written: July 1, 2018

Abstract

This paper studies an informational role of a decision to appoint a black director (BD) to a white board in a regime shaped by the Sarbanes-Oxley Act. I find that the decision slashes firm valuation, perhaps because it reveals the true color of existing white directors (WDs) are gray. A director is white if she passes independence criteria of both SEC and a proxy advisor and black if she passes only SEC's. Knowing the proxy advisor detects BDs and investors disfavor them, a manager appoints a BD only when he expects greater private benefits than a valuation loss and runs out of gray directors (GDs). Consistent with the mechanism, I find that a manager makes a board gray when he is short of GDs, and firm value plunges only when he turns a board gray; it varies little when he makes a board grayer or less gray. Moreover, investors find a WD of a gray board less valuable than of a white board when she suddenly passes away, suggesting the association is causal.

Keywords: board independence, board composition, black director, corporate governance

JEL Classification: G34, G38, K22

Suggested Citation

Hwang, Sunwoo, Black Directors: Sarbanes-Oxley and Hidden Board Independence (July 1, 2018). Available at SSRN: https://ssrn.com/abstract=3102747 or http://dx.doi.org/10.2139/ssrn.3102747

Sunwoo Hwang (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States

HOME PAGE: http://www.sunwoohwang.com

Register to save articles to
your library

Register

Paper statistics

Downloads
90
Abstract Views
2,072
rank
289,973
PlumX Metrics