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Are Interlocked Directors Effective Monitors?

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  • 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
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