As evident from recent changes in NYSE and Nasdaq listing requirements, board
independence is considered an important constituent of firms?? corporate governance
structures. However, the empirical evidence regarding the impact of board structure on
firm performance is mixed. Since firms employ a variety of governance mechanism to
control agency problems, the significance of board independence may depend upon the
strengths of other governance mechanisms.
I study the importance of board independence from the viewpoint of an investor
by examining the market reaction to board member resignation announcements. I then
examine this market reaction in the context of each firm??s existing governance structure
and business environment. I find that investors react more negatively when an outside
director resigns from the board than when an inside or gray director resigns. More
importantly, I find that investor reaction to outside director resignation is less negative
when insider or non-affiliated blockholder stock ownership is high. This evidence
suggests that board independence and insider ownership and non-affiliated blockholder
ownership may serve as substitutes. Furthermore, the evidence indicates that firms may
require higher board oversight when a large part of managerial compensation is based on
stock incentives. This finding suggests that overly high levels of stock-based managerial
compensation may exacerbate agency problems. Taken together, these results have
important implications for choosing an effective set of governance mechanisms that may
work independently or in combination with each other to mitigate the agency cost of
equity.
| Identifer | oai:union.ndltd.org:tamu.edu/oai:repository.tamu.edu:1969.1/2340 |
| Date | 29 August 2005 |
| Creators | Gupta, Manu |
| Contributors | Fields, L. Paige |
| Publisher | Texas A&M University |
| Source Sets | Texas A and M University |
| Language | en_US |
| Detected Language | English |
| Type | Book, Thesis, Electronic Dissertation, text |
| Format | 362358 bytes, electronic, application/pdf, born digital |
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