Working Paper: NBER ID: w19809
Authors: Kathy Fogel; Liping Ma; Randall Morck
Abstract: Shareholder valuations are economically and statistically positively correlated with independent director power, gauged by a composite of social network power centrality measures. Powerful independent directors’ sudden deaths reduce shareholder value significantly; other independent directors’ deaths do not, consistent with powerful independent directors increasing firm valuations. Further tests associate more powerful independent directors with less value-destroying M&A, less free cash flow retention, more CEO accountability, and less earnings management. We interpret these findings as more powerful independent directors better detecting and countering CEO missteps because of better access to information, greater credibility in challenging errant top managers, or both.
Keywords: Independent Directors; Corporate Governance; Shareholder Value
JEL Codes: D85; G02; G3; G34; G38; K22; L2; Z13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| powerful independent directors (G34) | shareholder valuations (G32) |
| sudden deaths of powerful independent directors (G34) | shareholder value (G34) |
| powerful independent directors (G34) | agency problems (G34) |
| powerful independent directors (G34) | CEO accountability (G34) |
| powerful independent directors (G34) | earnings management (M52) |
| powerful independent directors (G34) | value-destroying mergers and acquisitions (G34) |