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

Sandra Cavaco, Patricia Crifo, Antoine Reberioux and Gwenael Roudaut

Journal of Corporate Finance, 2017, vol. 43, issue C, 106-121

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).

Keywords: Board independence; Firm performance; Director ability; Informational deficit; Director selection (search for similar items in EconPapers)
JEL-codes: C21 G34 L21 M14 (search for similar items in EconPapers)
Date: 2017
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