IDEAS home Printed from https://ideas.repec.org/a/bla/finmgt/v38y2009i4p861-887.html
   My bibliography  Save this article

Are Interlocked Directors Effective Monitors?

Author

Listed:
  • Erik Devos
  • Andrew Prevost
  • John Puthenpurackal

Abstract

This paper examines whether the presence of interlocked directors on a board is associated with weak governance. For a sample of 3,566 firm‐years spanning 2001 to 2003, we find that firms with lower industry‐adjusted firm performance are more likely to have interlocked directors. We document that shareholders react negatively to the formation of director interlocks and find that the presence of interlocked directors is associated with lower than optimal pay‐performance sensitivity of CEO incentive compensation and reduced sensitivity of CEO turnover to firm performance. Collectively, our results suggest that the presence of interlocked directors is indicative of weak governance.

Suggested Citation

  • Erik Devos & Andrew Prevost & John Puthenpurackal, 2009. "Are Interlocked Directors Effective Monitors?," Financial Management, Financial Management Association International, vol. 38(4), pages 861-887, December.
    • Handle: RePEc:bla:finmgt:v:38:y:2009:i:4:p:861-887
    DOI: 10.1111/j.1755-053X.2009.01059.x
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/j.1755-053X.2009.01059.x
    Download Restriction: no
    File URL: https://libkey.io/10.1111/j.1755-053X.2009.01059.x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Fama, Eugene F & French, Kenneth R, 1992. "The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    2. Robert M. Bowen & Shivaram Rajgopal & Mohan Venkatachalam, 2008. "Accounting Discretion, Corporate Governance, and Firm Performance," Contemporary Accounting Research, John Wiley & Sons, vol. 25(2), pages 351-405, June.
    3. Bebchuk, Lucian A. & Cohen, Alma, 2005. "The costs of entrenched boards," Journal of Financial Economics, Elsevier, vol. 78(2), pages 409-433, November.
    4. Anil Shivdasani & David Yermack, 1999. "CEO Involvement in the Selection of New Board Members: An Empirical Analysis," Journal of Finance, American Finance Association, vol. 54(5), pages 1829-1853, October.
    5. repec:bla:jfinan:v:58:y:2003:i:3:p:1087-1112 is not listed on IDEAS
    6. Eliezer M. Fich & Anil Shivdasani, 2006. "Are Busy Boards Effective Monitors?," Journal of Finance, American Finance Association, vol. 61(2), pages 689-724, April.
    7. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    8. Mark R. Huson & Robert Parrino & Laura T. Starks, 2001. "Internal Monitoring Mechanisms and CEO Turnover: A Long‐Term Perspective," Journal of Finance, American Finance Association, vol. 56(6), pages 2265-2297, December.
    9. Thomas Koenig & Robert Gogel, 1981. "Interlocking Corporate Directorships as a Social Network," American Journal of Economics and Sociology, Wiley Blackwell, vol. 40(1), pages 37-50, January.
    10. Amemiya, Takeshi, 1978. "The Estimation of a Simultaneous Equation Generalized Probit Model," Econometrica, Econometric Society, vol. 46(5), pages 1193-1205, September.
    11. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    12. Faleye, Olubunmi, 2007. "Classified boards, firm value, and managerial entrenchment," Journal of Financial Economics, Elsevier, vol. 83(2), pages 501-529, February.
    13. Yermack, David, 1996. "Higher market valuation of companies with a small board of directors," Journal of Financial Economics, Elsevier, vol. 40(2), pages 185-211, February.
    14. McConnell, John J. & Servaes, Henri, 1990. "Additional evidence on equity ownership and corporate value," Journal of Financial Economics, Elsevier, vol. 27(2), pages 595-612, October.
    15. Core, John E. & Holthausen, Robert W. & Larcker, David F., 1999. "Corporate governance, chief executive officer compensation, and firm performance," Journal of Financial Economics, Elsevier, vol. 51(3), pages 371-406, March.
    16. Boehmer, Ekkehart & Masumeci, Jim & Poulsen, Annette B., 1991. "Event-study methodology under conditions of event-induced variance," Journal of Financial Economics, Elsevier, vol. 30(2), pages 253-272, December.
    17. Klein, April, 1998. "Firm Performance and Board Committee Structure," Journal of Law and Economics, University of Chicago Press, vol. 41(1), pages 275-303, April.
    18. Cotter, James F. & Shivdasani, Anil & Zenner, Marc, 1997. "Do independent directors enhance target shareholder wealth during tender offers?," Journal of Financial Economics, Elsevier, vol. 43(2), pages 195-218, February.
    19. Coughlan, Anne T. & Schmidt, Ronald M., 1985. "Executive compensation, management turnover, and firm performance : An empirical investigation," Journal of Accounting and Economics, Elsevier, vol. 7(1-3), pages 43-66, April.
    20. Jensen, Michael C & Murphy, Kevin J, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 225-264, April.
    21. John Core & Wayne Guay, 2002. "Estimating the Value of Employee Stock Option Portfolios and Their Sensitivities to Price and Volatility," Journal of Accounting Research, Wiley Blackwell, vol. 40(3), pages 613-630, June.
    22. Agrawal, Anup & Knoeber, Charles R., 1996. "Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(3), pages 377-397, September.
    23. Fich, Eliezer M. & White, Lawrence J., 2005. "Why do CEOs reciprocally sit on each other's boards?," Journal of Corporate Finance, Elsevier, vol. 11(1-2), pages 175-195, March.
    24. Fama, Eugene F & Jensen, Michael C, 1983. "Separation of Ownership and Control," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 301-325, June.
    25. Core, John & Guay, Wayne, 1999. "The use of equity grants to manage optimal equity incentive levels," Journal of Accounting and Economics, Elsevier, vol. 28(2), pages 151-184, December.
    26. Coles, Jeffrey L. & Daniel, Naveen D. & Naveen, Lalitha, 2006. "Managerial incentives and risk-taking," Journal of Financial Economics, Elsevier, vol. 79(2), pages 431-468, February.
    27. Rosenstein, Stuart & Wyatt, Jeffrey G., 1990. "Outside directors, board independence, and shareholder wealth," Journal of Financial Economics, Elsevier, vol. 26(2), pages 175-191, August.
    28. Anup Agrawal & Charles R. Knoeber, "undated". "Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders (Revision of 29-94)," Rodney L. White Center for Financial Research Working Papers 08-96, Wharton School Rodney L. White Center for Financial Research.
    29. Hallock, Kevin F., 1997. "Reciprocally Interlocking Boards of Directors and Executive Compensation," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(3), pages 331-344, September.
    30. Tong, Zhenxu, 2008. "Deviations from optimal CEO ownership and firm value," Journal of Banking & Finance, Elsevier, vol. 32(11), pages 2462-2470, November.
    31. Byrd, John W. & Hickman, Kent A., 1992. "Do outside directors monitor managers? *1: Evidence from tender offer bids," Journal of Financial Economics, Elsevier, vol. 32(2), pages 195-221, October.
    32. John, Kose & Senbet, Lemma W., 1998. "Corporate governance and board effectiveness1," Journal of Banking & Finance, Elsevier, vol. 22(4), pages 371-403, May.
    33. Anup Agrawal & Charles R. Knoeber, "undated". "Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders (Revision of 29-94)," Rodney L. White Center for Financial Research Working Papers 8-96, Wharton School Rodney L. White Center for Financial Research.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Shan Xue & Yi Tang & Yuehua Xu & Chu-Ding Ling & Xiao-Yun Xie & Shenjiang Mo, 2024. "How boards’ factional faultlines affect corporate financial fraud," Asia Pacific Journal of Management, Springer, vol. 41(1), pages 351-376, March.
    2. Matthias Raddant & Hiroshi Takahashi, 2022. "Corporate boards, interorganizational ties and profitability: the case of Japan," Empirical Economics, Springer, vol. 62(3), pages 1365-1406, March.
    3. Bill Francis & Iftekhar Hasan & Qiang Wu, 2015. "Professors in the Boardroom and Their Impact on Corporate Governance and Firm Performance," Financial Management, Financial Management Association International, vol. 44(3), pages 547-581, September.
    4. Raddant, Matthias & Takahashi, Hiroshi, 2022. "Interdependencies of female board member appointments," International Review of Financial Analysis, Elsevier, vol. 81(C).
    5. Pombo, Carlos & Gutiérrez, Luis H., 2011. "Outside directors, board interlocks and firm performance: Empirical evidence from Colombian business groups," Journal of Economics and Business, Elsevier, vol. 63(4), pages 251-277, July.
    6. Abdelrhman Yusuf & Mohamed Sherif, 2020. "All on Board? New Evidence on Board Characteristics from a Large Panel of UK FTSE Indices," Sustainability, MDPI, vol. 12(13), pages 1-26, July.
    7. Tetsuji Okazaki & Michiru Sawada, 2012. "Interbank networks in prewar Japan: structure and implications," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 21(2), pages 463-506, April.
    8. Ferris, Stephen P. & Jayaraman, Narayanan & Liao, Min-Yu (Stella), 2020. "Better directors or distracted directors? An international analysis of busy boards," Global Finance Journal, Elsevier, vol. 44(C).
    9. Marco Caiffa & Vincenzo Farina & Lucrezia Fattobene, 2020. "All that glitters is not gold: CEOs' celebrity beyond media content," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 25(3), pages 444-460, July.
    10. Daniel Sungyeon Kim & Hong Kee Sul, 2021. "Diversity Matters: A Study on the Relationship between Board Career Diversity and Firm Performance," Sustainability, MDPI, vol. 13(17), pages 1-24, August.
    11. Huang, Haijie & Lee, Edward & Lyu, Changjiang & Zhu, Zhenmei, 2016. "The effect of accounting academics in the boardroom on the value relevance of financial reporting information," International Review of Financial Analysis, Elsevier, vol. 45(C), pages 18-30.
    12. Kok, Seng Kiong & Giorgioni, Gianluigi & Farquhar, Stuart, 2022. "The trade-off between knowledge accumulation and independence: The case of the Shariah supervisory board within the Shariah governance and firm performance nexus," Research in International Business and Finance, Elsevier, vol. 59(C).
    13. Dong, Yizhe & Duan, Tinghua & Hou, Wenxuan & Liu, Yue (Lucy), 2019. "Athletes in boardrooms: Evidence from the world," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 59(C), pages 165-183.
    14. Mitja Steinbacher & Matthias Raddant & Fariba Karimi & Eva Camacho Cuena & Simone Alfarano & Giulia Iori & Thomas Lux, 2021. "Advances in the agent-based modeling of economic and social behavior," SN Business & Economics, Springer, vol. 1(7), pages 1-24, July.
    15. Chao Jiang & Thomas R. Kubick & Mihail K. Miletkov & M. Babajide Wintoki, 2018. "Offshore Expertise for Onshore Companies: Director Connections to Island Tax Havens and Corporate Tax Policy," Management Science, INFORMS, vol. 64(7), pages 3241-3268, July.
    16. Yujia Liu & Ligang Liu & Ying Li, 2023. "Executive Hometown Identity and Green Innovation in Enterprises of Heavy Polluting Industries—A Dual Perspective Based on Conscious Motivation and Resource Access," Sustainability, MDPI, vol. 15(8), pages 1-20, April.
    17. Lucrezia Fattobene & Marco Caiffa, 2016. "Sitting on the Board or Sitting on the Throne? Evidence of Boards' Overconfidence from the Italian Market," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 45(2), pages 235-269, July.
    18. Yushi Jiang & Muhammad Shujaat Mubarik & Syed Imran Zaman & Syed Hasnain Alam & Muhammad Arif, 2024. "Corporate governance, cash holding, and firm performance in an emerging market," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(3), pages 2787-2803, July.
    19. Subramanian R. Iyer & Harikumar Sankaran & Yan Zhang, 2020. "Do Well‐Connected Boards Invest Optimally In R&D Activities?," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 43(4), pages 895-932, December.
    20. Claire E. F. Wright, 2022. "Above board? Interlocking directorates and corporate contagion in 1980s Australia," Australian Economic History Review, Economic History Society of Australia and New Zealand, vol. 62(3), pages 290-312, November.
    21. Erlane K Ghani & Ham Xairyani Mohamed & Kamaruzzaman Muhammad, 2019. "Board Characteristics and Foreign Direct Investment in Public Listed Property Companies: A Malaysian Evidence," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 10(3), pages 116-131, May.
    22. Wen, Fenghua & Lin, Diyue & Hu, Lei & He, Shaoyi & Cao, Zhiling, 2023. "The spillover effect of corporate frauds and stock price crash risk," Finance Research Letters, Elsevier, vol. 57(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bradley W. Benson & Wallace N. Davidson III & Hongxia Wang & Dan L. Worrell, 2011. "Deviations from Expected Stakeholder Management, Firm Value, and Corporate Governance," Financial Management, Financial Management Association International, vol. 40(1), pages 39-81, March.
    2. Benson, Bradley W. & Chen, Yu & James, Hui L. & Park, Jung Chul, 2020. "So far away from me: Firm location and the managerial ownership effect on firm value," Journal of Corporate Finance, Elsevier, vol. 64(C).
    3. James, Hui & Benson, Bradley W. & Wu, Chen (Ken), 2017. "Does CEO ownership affect payout policy? Evidence from using CEO scaled wealth-performance sensitivity," The Quarterly Review of Economics and Finance, Elsevier, vol. 65(C), pages 328-345.
    4. Bill Francis & Iftekhar Hasan & Qiang Wu, 2015. "Professors in the Boardroom and Their Impact on Corporate Governance and Firm Performance," Financial Management, Financial Management Association International, vol. 44(3), pages 547-581, September.
    5. Aziz Jaafar & Lynn Hodgkinson & Mao-Feng Kao, 2019. "Ownership Structure, Board of Directors and Firm Performance: Evidence from Taiwan," Working Papers 19011, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
    6. Steve Lin & Peter F. Pope & Steven Young, 2003. "Stock Market Reaction to the Appointment of Outside Directors," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 30(3‐4), pages 351-382, April.
    7. James, Hui Liang & Borah, Nilakshi & Lirely, Roger, 2022. "The effectiveness of board independence in high-discretion firms," The Quarterly Review of Economics and Finance, Elsevier, vol. 85(C), pages 103-117.
    8. Chaur-Shiuh Young & Liu-Ching Tsai & Pei-Gin Hsieh, 2008. "Voluntary Appointment of Independent Directors in Taiwan: Motives and Consequences," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 35(9-10), pages 1103-1137.
    9. Chi, Jianxin Daniel & Scott Lee, D., 2010. "The conditional nature of the value of corporate governance," Journal of Banking & Finance, Elsevier, vol. 34(2), pages 350-361, February.
    10. Prevost, Andrew K. & Rao, Ramesh P. & Hossain, Mahmud, 2002. "Determinants of board composition in New Zealand: a simultaneous equations approach," Journal of Empirical Finance, Elsevier, vol. 9(4), pages 373-397, November.
    11. Nguyen, Bang Dang & Nielsen, Kasper Meisner, 2010. "The value of independent directors: Evidence from sudden deaths," Journal of Financial Economics, Elsevier, vol. 98(3), pages 550-567, December.
    12. Amitava Roy, 2014. "Corporate Governance and Firm Performance: An Exploratory Analysis of Indian Listed Companies," Jindal Journal of Business Research, , vol. 3(1-2), pages 93-120, June.
    13. Carola Frydman & Dirk Jenter, 2010. "CEO Compensation," Annual Review of Financial Economics, Annual Reviews, vol. 2(1), pages 75-102, December.
    14. Crespí-Cladera, Rafel & Pascual-Fuster, Bartolomé, 2014. "Does the independence of independent directors matter?," Journal of Corporate Finance, Elsevier, vol. 28(C), pages 116-134.
    15. Nicola Moscariello & Michele Pizzo & Dmytro Govorun & Alexander Kostyuk, 2019. "Independent minority directors and firm value in a principal–principal agency setting: evidence from Italy," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 23(1), pages 165-194, March.
    16. Hossain, Mahmud & Prevost, Andrew K. & Rao, Ramesh P., 2001. "Corporate governance in New Zealand: The effect of the 1993 Companies Act on the relation between board composition and firm performance," Pacific-Basin Finance Journal, Elsevier, vol. 9(2), pages 119-145, April.
    17. Anup Agrawal & Tareque Nasser, 2019. "Blockholders on Boards and CEO Compensation, Turnover and Firm Valuation," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 9(03), pages 1-67, September.
    18. Huilong Liu & Hong Wang & Liansheng Wu, 2016. "Removing Vacant Chairs: Does Independent Directors’ Attendance at Board Meetings Matter?," Journal of Business Ethics, Springer, vol. 133(2), pages 375-393, January.
    19. Howell, Jann C. & Stover, Roger D., 2002. "How much do governance and managerial behavior matter in investment decisions? Evidence from failed thrift auctions," Journal of Corporate Finance, Elsevier, vol. 8(3), pages 195-211, July.
    20. Benson, Bradley W. & Lian, Qin & Wang, Qiming, 2016. "Stock ownership guidelines for CEOs: Do they (not) meet expectations?," Journal of Banking & Finance, Elsevier, vol. 69(C), pages 52-71.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:finmgt:v:38:y:2009:i:4:p:861-887. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/fmaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.