No CrossRef data available.
Article contents
Independent Director Tenure and Corporate Governance: Evidence from Insider Trading
Published online by Cambridge University Press: 19 April 2023
Abstract
Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.
Executives trade more profitably and opportunistically over the course of the tenure of independent directors (IDs). IDs’ increased connections with and hence allegiance to executives are likely the channel through which ID tenure can affect executive trading. Executive opportunism is mitigated by disciplinary factors that include the presence of a firm’s internal trading policy, blockholders, and IDs with legal expertise as well as the risk of shareholder-initiated derivative lawsuits. These results point to an association between long-tenured IDs and weakened corporate governance.
- Type
- Research Article
- Information
- Creative Commons
This is an Open Access article, distributed under the terms of the Creative Commons Attribution-NonCommercial-NoDerivatives licence (http://creativecommons.org/licenses/by-nc-nd/4.0), which permits non-commercial re-use, distribution, and reproduction in any medium, provided that no alterations are made and the original article is properly cited. The written permission of Cambridge University Press must be obtained prior to any commercial use and/or adaptation of the article.- Copyright
- © The Author(s), 2023. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington
Footnotes
We thank an anonymous referee, Renee Adams, Philip Bond, Travers Child, David Erkens, Viktar Fedaseyeu, Jarrad Harford, Sterling Huang, Paul Malatesta (the editor), Ronald Masulis, Holger Spamann, Frank Yu, and conference and seminar participants at CEIBS, the 2017 Financial Management Association annual meetings (Asia), the 2017 Financial Management Association annual meetings, the 2017 Australasian Finance and Banking Conference, Peking University, Renmin University, Singapore Management University, and Tsinghua University for their comments. We also thank Yuan Meng and Huilin Yang for their excellent research assistance. Gao acknowledges the fund support by the “Fundamental Research Funds for the Central Universities” in UIBE (19QN10). All remaining errors are our own.
References
Adams, R. B., and Ferreira, D.. “A Theory of Friendly Boards.” Journal of Finance, 62 (2007), 217–250.10.1111/j.1540-6261.2007.01206.xCrossRefGoogle Scholar
Adams, R. B.; Hermalin, B. E.; and Weisbach, M. S.. “The Role of Boards of Directors in Corporate Governance: A Conceptual Framework and Survey.” Journal of Economic Literature, 48 (2010), 58–107.10.1257/jel.48.1.58CrossRefGoogle Scholar
Adhikari, B.; Agrawal, A.; and Sharma, B.. “Does Litigation Risk Deter Insider Trading? Evidence from Universal Demand Laws.” Available at SSRN 3404720 (2019).10.2139/ssrn.3404720CrossRefGoogle Scholar
Agrawal, A.; Jaffe, J. F.; and Karpoff, J. M.. “Management Turnover and Governance Changes Following the Revelation of Fraud.” Journal of Law and Economics, 42 (1999), 309–342.10.1086/467427CrossRefGoogle Scholar
Ali, U., and Hirshleifer, D.. “Opportunism as a Firm and Managerial Trait: Predicting Insider Trading Profits and Misconduct.” Journal of Financial Economics, 126 (2017), 490–515.10.1016/j.jfineco.2017.09.002CrossRefGoogle Scholar
Beasley, M. S. “An Empirical Analysis of the Relation Between the Board of Director Composition and Financial Statement Fraud.” Accounting Review, 71 (1996), 443–465.Google Scholar
Berberich, G., and Niu, F., “Director Busyness, Director Tenure and the Likelihood of Encountering Corporate Governance Problems.” Paper presented at the CAAA Annual Conference, Toronto, ON, Canada, May 26–29 (2011).10.2139/ssrn.1742483CrossRefGoogle Scholar
Bettis, J. C.; Coles, J. L.; and Lemmon, M. L.. “Corporate Policies Restricting Trading by Insiders.” Journal of Financial Economics, 57 (2000), 191–220.10.1016/S0304-405X(00)00055-6CrossRefGoogle Scholar
Bhagat, S.; Brickley, J. A.; and Coles, J. L.. “Managerial Indemnification and Liability Insurance: The Effect on Shareholder Wealth.” Journal of Risk and Insurance, 54 (1987), 721–736.10.2307/253119CrossRefGoogle Scholar
Brickley, J. A.; Coles, J. L.; and Terry, R. L.. “Outside Directors and the Adoption of Poison Pills.” Journal of Financial Economics, 35 (1994), 371–390.10.1016/0304-405X(94)90038-8CrossRefGoogle Scholar
Brochet, F., and Srinivasan, S.. “Accountability of Independent Directors: Evidence from Firms Subject to Securities Litigation.” Journal of Financial Economics, 111 (2014), 430–449.10.1016/j.jfineco.2013.10.013CrossRefGoogle Scholar
Buchanan, B. “Building Organizational Commitment: The Socialization of Managers in Work Organizations.” Administrative Science Quarterly, 19 (1974), 533–546.Google Scholar
Cai, Y.; Xu, J.; and Yang, J.. “Paying by Donating: Corporate Donations Affiliated with Independent Directors.” Review of Financial Studies, 34 (2021), 618–660.10.1093/rfs/hhaa056CrossRefGoogle Scholar
Cohen, L.; Frazzini, A.; and Malloy, C. J.. “Hiring Cheerleaders: Board Appointments of ‘Independent’ Directors.” Management Science, 58 (2012a), 1039–1058.10.1287/mnsc.1110.1483CrossRefGoogle Scholar
Cohen, L.; Malloy, C.; and Pomorski, L.. “Decoding Inside Information.” Journal of Finance, 67 (2012b), 1009–1043.10.1111/j.1540-6261.2012.01740.xCrossRefGoogle Scholar
Coles, J. L.; Daniel, N. D.; and Naveen, L.. “Boards: Does One Size Fit All?” Journal of Financial Economics, 87 (2008), 329–356.10.1016/j.jfineco.2006.08.008CrossRefGoogle Scholar
Coles, J. L.; Daniel, N. D.; and Naveen, L.. “Co-Opted Boards.” Review of Financial Studies, 27 (2014), 1751–1796.10.1093/rfs/hhu011CrossRefGoogle Scholar
Dai, L.; Fu, R.; Kang, J.-K.; and Lee, I.. “Corporate Governance and the Profitability of Insider Trading.” Journal of Corporate Finance, 40 (2016), 235–253.10.1016/j.jcorpfin.2016.08.002CrossRefGoogle Scholar
Davis, K. B. Jr. “The Forgotten Derivative Suit.” Vanderbilt Law Review, 61 (2008), 387–451.Google Scholar
Dou, Y.; Sahgal, S.; and Zhang, E. J.. “Should Independent Directors Have Term Limits? The Role of Experience in Corporate Governance.” Financial Management, 44 (2015), 583–621.10.1111/fima.12091CrossRefGoogle Scholar
Duchin, R.; Matsusaka, J. G.; and Ozbas, O.. “When Are Outside Directors Effective?” Journal of Financial Economics, 96 (2010), 195–214.10.1016/j.jfineco.2009.12.004CrossRefGoogle Scholar
Fahlenbrach, R.; Low, A.; and Stulz, R. M.. “Do Independent Director Departures Predict Future Bad Events?” Review of Financial Studies, 30 (2017), 2313–2358.10.1093/rfs/hhx009CrossRefGoogle Scholar
Ferris, S. P.; Jagannathan, M.; and Pritchard, A. C.. “Too Busy to Mind the Business? Monitoring by Directors with Multiple Board Appointments.” Journal of Finance, 58 (2003), 1087–1111.10.1111/1540-6261.00559CrossRefGoogle Scholar
Ferris, S. P.; Jandik, T.; Lawless, R. M.; and Makhija, A.. “Derivative Lawsuits as a Corporate Governance Mechanism: Empirical Evidence on Board Changes Surrounding Filings.” Journal of Financial and Quantitative Analysis, 42 (2007), 143–165.10.1017/S0022109000002222CrossRefGoogle Scholar
Fich, E. M.; Parrino, R.; and Tran, A. L.. “When and How Are Rule 10b5-1 Plans Used for Insider Stock Sales?” Available at SSRN 2579047 (2021).Google Scholar
Fich, E. M., and Shivdasani, A.. “Financial Fraud, Director Reputation, and Shareholder Wealth.” Journal of Financial Economics, 86 (2007), 306–336.10.1016/j.jfineco.2006.05.012CrossRefGoogle Scholar
Field, L.; Lowry, M.; and Mkrtchyan, A.. “Are Busy Boards Detrimental?” Journal of Financial Economics, 109 (2013), 63–82.10.1016/j.jfineco.2013.02.004CrossRefGoogle Scholar
Firth, D. “Bias Reduction of Maximum Likelihood Estimates.” Biometrika, 80 (1993), 27–38.10.1093/biomet/80.1.27CrossRefGoogle Scholar
Fracassi, C., and Tate, G.. “External Networking and Internal Firm Governance.” Journal of Finance, 67 (2012), 153–194.10.1111/j.1540-6261.2011.01706.xCrossRefGoogle Scholar
Gardner, J. “Two-Stage Differences in Differences.” arXiv preprint arXiv:2207.05943 (2021).Google Scholar
Güner, A. B.; Malmendier, U.; and Tate, G.. “Financial Expertise of Directors.” Journal of Financial Economics, 88 (2008), 323–354.10.1016/j.jfineco.2007.05.009CrossRefGoogle Scholar
Guo, L., and Masulis, R. W.. “Board Structure and Monitoring: New Evidence from CEO Turnovers.” Review of Financial Studies, 28 (2015), 2770–2811.10.1093/rfs/hhv038CrossRefGoogle Scholar
Harris, M., and Raviv, A.. “A Theory of Board Control and Size.” Review of Financial Studies, 21 (2008), 1797–1832.10.1093/rfs/hhl030CrossRefGoogle Scholar
Hermalin, B., and Weisbach, M.. “Board of Directors as an Endogenously Determined Illusion.” Economic Policy Review, 9 (2003), 1–20.Google Scholar
Hermalin, B. E., and Weisbach, M. S.. “Endogenously Chosen Boards of Directors and Their Monitoring of the CEO.” American Economic Review, 88 (1998), 96–118.Google Scholar
Holderness, C. G. “Liability Insurers as Corporate Monitors.” International Review of Law and Economics, 10 (1990), 115–129.10.1016/0144-8188(90)90018-OCrossRefGoogle Scholar
Huang, S., and Hilary, G.. “Zombie Board: Board Tenure and Firm Performance.” Journal of Accounting Research, 56 (2018), 1285–1329.10.1111/1475-679X.12209CrossRefGoogle Scholar
Hugon, A., and Lee, Y.-J.. “SEC Rule 10b5-1 Plans and Strategic Trade Around Earnings Announcements.” Available at SSRN 2880878 (2016).10.2139/ssrn.2880878CrossRefGoogle Scholar
Hwang, B.-H., and Kim, S.. “It Pays to Have Friends.” Journal of Financial Economics, 93 (2009), 138–158.10.1016/j.jfineco.2008.07.005CrossRefGoogle Scholar
Jagolinzer, A. D. “SEC Rule 10b5-1 and Insiders’ Strategic Trade.” Management Science, 55 (2009), 224–239.10.1287/mnsc.1080.0928CrossRefGoogle Scholar
Jagolinzer, A. D.; Larcker, D. F.; and Taylor, D. J.. “Corporate Governance and the Information Content of Insider Trades.” Journal of Accounting Research, 49 (2011), 1249–1274.10.1111/j.1475-679X.2011.00424.xCrossRefGoogle Scholar
Jia, N. “Should Directors Have Term Limits?—Evidence from Corporate Innovation.” European Accounting Review, 26 (2017), 755–785.10.1080/09638180.2016.1199321CrossRefGoogle Scholar
Jung, S.; Nam, J.; and Shu, S., “Shareholder Litigation and Insider Trading: Evidence from Derivative Lawsuits.” Paper presented at the Asian Finance Association (AsianFA) 2018 Conference (2018).10.2139/ssrn.3109369CrossRefGoogle Scholar
Karpoff, J. M.; Lee, D. S.; and Martin, G. S.. “The Consequences to Managers for Cooking the Books.” Journal of Financial Economics, 88 (2008), 193–215.10.1016/j.jfineco.2007.06.003CrossRefGoogle Scholar
Kim, E. H., and Lu, Y.. “Executive Suite Independence: Is It Related to Board Independence?” Management Science, 64 (2018), 1015–1033.10.1287/mnsc.2016.2603CrossRefGoogle Scholar
Kim, K.; Mauldin, E.; and Patro, S.. “Outside Directors and Board Advising and Monitoring Performance.” Journal of Accounting and Economics, 57 (2014), 110–131.10.1016/j.jacceco.2014.02.001CrossRefGoogle Scholar
Lee, I.; Lemmon, M.; Li, Y.; and Sequeira, J. M.. “Do Voluntary Corporate Restrictions on Insider Trading Eliminate Informed Insider Trading?” Journal of Corporate Finance, 29 (2014), 158–178.10.1016/j.jcorpfin.2014.07.005CrossRefGoogle Scholar
Masulis, R. W. “A Survey of Recent Evidence on Boards of Directors and CEO Incentives.” Asia-Pacific Journal of Financial Studies, 49 (2020), 7–35.10.1111/ajfs.12287CrossRefGoogle Scholar
Masulis, R. W., and Reza, S. W.. “Agency Problems of Corporate Philanthropy.” Review of Financial Studies, 28 (2015), 592–636.10.1093/rfs/hhu082CrossRefGoogle Scholar
Nguyen, B. D., and Nielsen, K. M.. “The Value of Independent Directors: Evidence from Sudden Deaths.” Journal of Financial Economics, 98 (2010), 550–567.10.1016/j.jfineco.2010.07.004CrossRefGoogle Scholar
Perry, T., and Peyer, U.. “Board Seat Accumulation by Executives: A Shareholder’s Perspective.” Journal of Finance, 60 (2005), 2083–2123.10.1111/j.1540-6261.2005.00788.xCrossRefGoogle Scholar
Raheja, C. G. “Determinants of Board Size and Composition: A Theory of Corporate Boards.” Journal of Financial and Quantitative Analysis, 40 (2005), 283–306.10.1017/S0022109000002313CrossRefGoogle Scholar
Ravina, E., and Sapienza, P.. “What Do Independent Directors Know? Evidence from Their Trading.” Review of Financial Studies, 23 (2010), 962–1003.10.1093/rfs/hhp027CrossRefGoogle Scholar
Roulstone, D. T. “Analyst Following and Market Liquidity.” Contemporary Accounting Research, 20 (2003), 552–578.10.1506/X45Y-PMH7-PNYK-4ET1CrossRefGoogle Scholar
Skaife, H. A.; Veenman, D.; and Wangerin, D.. “Internal Control over Financial Reporting and Managerial Rent Extraction: Evidence from the Profitability of Insider Trading.” Journal of Accounting and Economics, 55 (2013), 91–110.10.1016/j.jacceco.2012.07.005CrossRefGoogle Scholar
Vafeas, N. “Length of Board Tenure and Outside Director Independence.” Journal of Business Finance & Accounting, 30 (2003), 1043–1064.10.1111/1468-5957.05525CrossRefGoogle Scholar
Vance, S. C. Corporate Leadership: Boards, Directors, and Strategy. New York: McGraw-Hill (1983).Google Scholar
Weisbach, M. S. “Outside Directors and CEO Turnover.” Journal of Financial Economics, 20 (1988), 431–460.10.1016/0304-405X(88)90053-0CrossRefGoogle Scholar
Wooldridge, J. “Two-Way Fixed Effects, the Two-Way Mundlak Regression, and Difference-in-Differences Estimators.” Available at SSRN 3906345 (2021).10.2139/ssrn.3906345CrossRefGoogle Scholar
Gao and Huang supplementary material
Gao and Huang supplementary material
File
230.6 KB
You have
Access
Open access