Who's Monitoring the Monitor? Do Outside Directors Protect Shareholders' Interests?
28 Pages Posted: 31 Dec 2003
Date Written: June 2003
The corporate governance literature is rich with empirical tests of the relation between board composition and firm performance. We consider the effect of board composition on a different measure of performance, the probability a firm will be sued by shareholders. We find firms that are defendants in securities litigation have higher proportions of insiders and of gray directors and have smaller boards than a matched group of firms that are not sued, even when controlling for firm value and industry. The results suggest that boards with higher proportions of outside directors do a better job of monitoring management.
Keywords: Board of directors, corporate governance, monitoring, shareholder lawsuits
JEL Classification: K33
Suggested Citation: Suggested Citation