Outside Directors and Corporate Board Decisions: A Natural Experiment

41 Pages Posted: 30 Nov 2002

See all articles by Jay Dahya

Jay Dahya

Zicklin School of Business, Baruch College - The City University of New York

John J. McConnell

Purdue University

Date Written: November 29, 2001

Abstract

During the 1990s, the global economy appears to have suffered an outbreak of "outside director mania" - at least 18 countries have witnessed publication of guidelines that stipulate floors for the representation of outside directors on corporate boards. The apparent (largely untested) premise underlying this movement is that boards with significant outside directors will make different (and perhaps better) decisions than boards dominated by inside directors. As the first-mover in this movement, the U.K. provides a laboratory for a "natural experiment" to examine this presumption empirically. We investigate one key board task - the appointment of the CEO - to determine whether boards are more likely to appoint an outside CEO after they have increased the representation of outside directors to comply with the exogenously imposed standards. We find that the (coerced) increase in outside directors does alter the CEO selection decision. Additionally, announcement period stock returns indicate that the decisions are not only different, they also appear to be better.

Suggested Citation

Dahya, Jay and McConnell, John J., Outside Directors and Corporate Board Decisions: A Natural Experiment (November 29, 2001). AFA 2003 Washington, DC Meetings. Available at SSRN: https://ssrn.com/abstract=354380 or http://dx.doi.org/10.2139/ssrn.354380

Jay Dahya (Contact Author)

Zicklin School of Business, Baruch College - The City University of New York ( email )

55 Lexington Ave., Box B13-260
New York, NY 10010
United States

John J. McConnell

Purdue University ( email )

MGMT, KRAN
403 West State St.
West Lafayette, IN 47907-2056
United States
765-494-5910 (Phone)
765-494-7863 (Fax)

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