How Valuable are Independent Directors? Evidence from External Distractions

How Valuable are Independent Directors? Evidence from External Distractions

Ronald Masulis, Emma Jincheng Zhang

Series number :

Serial Number: 
522/2017

Date posted :

August 02 2017

Last revised :

May 14 2018
SSRN Share

Keywords

  • Independent Directors • 
  • Director incentives • 
  • Director Distraction • 
  • corporate performance

We provide new evidence on the value of independent directors by exploiting exogenous events that seriously distract independent directors. Approximately 20% of independent directors are significantly distracted in a typical year.

They attend fewer meetings, trade less frequently in the firm’s stock and resign from the board more frequently, indicating declining firm-specific knowledge and a reduced board commitment. Firms with more preoccupied independent directors have declining firm valuation and operating performance and exhibit weaker M&A profitability and accounting quality. These effects are stronger when distracted independent directors play key board monitoring roles and when firms require greater director attention.

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Authors

Real name:
Emma Jincheng Zhang
Professor
Real name: 
Ronald Masulis
Research Member
School of Banking and Finance, Australian School of Business