Interlocked Monitors: How Do Independent Directors Evaluate CEOs?

Posted: 30 Oct 2023

See all articles by Jason (Pang-Li) Chen

Jason (Pang-Li) Chen

Harbert College of Business, Auburn University

Ran Duchin

Boston College - Carroll School of Management

Eliezer M. Fich

Drexel University - Department of Finance

Date Written: October 26, 2023

Abstract

This paper studies the role of director-specific measures of firm performance in CEO turnovers. A firm’s weak performance-ranking relative to a director’s interlocked firms predicts greater attendance of board meetings and a higher likelihood of forced CEO turnovers. These findings hold in tests that control for standard firm performance measures, in tight specifications that include firm-by-CEO, firm-by-year, or director-by-year fixed effects, and in an instrumental-variable based framework that exploits common exposure to local economic shocks. We also provide consistent evidence from falsification tests that reshuffle interlocks. In the cross-section, the effects are stronger for more influential directors and in firms with higher performance uncertainty. Interlock-driven turnovers are followed by weaker performance and analyst downgrades – consistent with an availability bias. Overall, we provide some of the cleanest estimates, to date, that directors influence CEO turnovers by following individual performance heuristics, with consequences for the efficacy of CEO turnovers and firm performance.

Keywords: Corporate governance, Boards, Independent directors, Firm performance, Interlocking directorates, Availability bias

JEL Classification: G34, G41

Suggested Citation

Chen, Jason (Pang-Li) and Duchin, Ran and Fich, Eliezer M., Interlocked Monitors: How Do Independent Directors Evaluate CEOs? (October 26, 2023). Available at SSRN: https://ssrn.com/abstract=4613884

Jason (Pang-Li) Chen (Contact Author)

Harbert College of Business, Auburn University ( email )

Auburn, AL 36849
United States

Ran Duchin

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Eliezer M. Fich

Drexel University - Department of Finance ( email )

LeBow College of Business
3220 Market Street – 11th Floor
Philadelphia, PA 19104
(215) 895-2304 (Phone)

HOME PAGE: http://https://sites.google.com/view/eliezerfich

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