Who's Monitoring the Monitor? Do Outside Directors Protect Shareholders' Interests?

Eric Helland and Michael Sykuta

The Financial Review, 2005, vol. 40, issue 2, 155-172

Abstract: The corporate governance literature is rich with empirical tests of the relation between board composition and firm performance. We consider the effect of board composition on a different measure of performance, the probability a firm will be sued by shareholders. We find firms that are defendants in securities litigation have higher proportions of insiders and of gray directors and have smaller boards than a matched group of firms that are not sued, even when controlling for firm value and industry. The results suggest that boards with higher proportions of outside directors do a better job of monitoring management.

Date: 2005
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