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Independent directors: Less informed but better selected than affiliated board members?

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  • Cavaco, Sandra
  • Crifo, Patricia
  • Rebérioux, Antoine
  • Roudaut, Gwenael

Abstract

This paper examines the relationships between independence, director unobservable ability and firm performance. We develop an original empirical strategy based on the AKM model to estimate separately director fixed effects (as a measure of individual ability) and firm fixed effects. We show that board independence has an ambiguous impact on corporate performance because of two opposing forces: one related to the director nomination process, the other one related to board functioning. On one hand, we report that independence is positively correlated with individual fixed effects, an evidence consistent with a nomination process of independent directors based on individual ability. On the other hand, and regarding board functioning, we show that independence, netted out individual ability, is negatively correlated with firm performance suggesting that independent board members experience an informational deficit (as compared to affiliated directors).

Suggested Citation

  • Cavaco, Sandra & Crifo, Patricia & Rebérioux, Antoine & Roudaut, Gwenael, 2017. "Independent directors: Less informed but better selected than affiliated board members?," Journal of Corporate Finance, Elsevier, vol. 43(C), pages 106-121.
    • Handle: RePEc:eee:corfin:v:43:y:2017:i:c:p:106-121
    DOI: 10.1016/j.jcorpfin.2017.01.004
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    More about this item

    Keywords

    Board independence; Firm performance; Director ability; Informational deficit; Director selection;
    All these keywords.

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility

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