The Elusive Monitoring Function of Independent Directors

Forthcoming, 21 University of Pennsylvania Journal of Business Law (2019)

Ross School of Business Paper No. 1384

49 Pages Posted: 21 Aug 2018

See all articles by Sureyya Burcu Avci

Sureyya Burcu Avci

Sabanci University - School of Management

Cindy A. Schipani

University of Michigan, Stephen M. Ross School of Business

H. Nejat Seyhun

University of Michigan, Stephen M. Ross School of Business

Date Written: June 1, 2018

Abstract

Federal law mandates that audit and compensation committees of public companies be comprised entirely of independent directors. The assumption underlying these legal requirements is that independent directors are more likely to act as monitors of the company’s top management. In this paper, we test this assumption. We conduct our tests by examining the level, direction, and profitability of independent directors’ insider trades and compare these to the trades of other members of top management in firms defending class-action lawsuits. Our evidence indicates that there are no differences between the trading activity of independent directors and other insiders during the class period. Our findings cast doubt on the effectiveness of independent directors’ monitoring role.

Keywords: Independent Directors, Corporate Governance, Corporate Fraud, Gatekeepers

JEL Classification: G34, G38, K22, K41, K42

Suggested Citation

Avci, Sureyya Burcu and Schipani, Cindy A. and Seyhun, H. Nejat, The Elusive Monitoring Function of Independent Directors (June 1, 2018). Forthcoming, 21 University of Pennsylvania Journal of Business Law (2019), Ross School of Business Paper No. 1384, Available at SSRN: https://ssrn.com/abstract=3236228

Sureyya Burcu Avci (Contact Author)

Sabanci University - School of Management ( email )

Istanbul
Turkey

Cindy A. Schipani

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI 48109
United States
(734) 763-2257 (Phone)
(734) 763-2257 (Fax)

H. Nejat Seyhun

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-763-5463 (Phone)

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