The Value of Independent Directors

In: Social Issues

Submitted By evaqiuyu
Words 12426
Pages 50
The Value of Independent Directors: Evidence from Sudden Deaths*
Bang Dang Nguyen Chinese University of Hong Kong nguyendang@cuhk.edu.hk

Kasper Meisner Nielsen Chinese University of Hong Kong and CEBR nielsen@cuhk.edu.hk

NOVEMBER 12, 2008 PRELIMINARY DRAFT – DO NOT QUOTE

Abstract
We investigate the contributions of independent directors to shareholder value by examining the stock price reaction to an exogenous event: sudden deaths of directors. Compiling an extensive database of sudden deaths of directors in the U.S. from 1994 to 2007, we find that following the death of an independent director, the firm’s stock price drops by almost 1% on average. For our control sample of inside and gray directors, we find no significant reaction to such events. The difference in abnormal returns following the sudden deaths of independent, gray and inside directors is statistically and economically significant given our sample’s average market capitalization of 5.3 billion dollars. Consistent with the view that independence is valuable, we find that stock prices react less negatively when the independent director is older, appointed to the board during the tenure of the current CEO, or when he has long board tenure. Our results hold when controlling for director-invariant heterogeneity (e.g. ability, experience, and skills) using a fixed-effect approach. Overall, our results demonstrate that independent directors provide a valuable service to shareholders.

Keywords: Independent Director, Sudden Death, Firm Value, Corporate Governance JEL Classifications: G3, G30

We thank Betty Shuet Lin Ng and Crystal Yuk Ip Shiu for excellent research assistance. Nguyen thanks the Chinese University of Hong Kong for financial support through a Direct Research Grant. Nielsen thanks the Danish Social Science Research Council and Danish Centre for Accounting and Finance (D-CAF) for…...

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