Boston University School of Law

 

The Firm-Value of Information Possessed by Independent Directors:
Evidence from a Natural Experiment

Boston University School of Law Law & Economics Paper No. 12-21
Boston University School of Law Public Law & Legal Theory Paper No. 12-21

 

Rajesh Chakrabarti
Indian School of Business

Krishnamurthy Subramanian
Indian School of Business (ISB), Hyderabad

Frederick Tung

Boston University School of Law

 


DOCUMENT REMOVED FROM SSRN ON 0CTOBER 1, 2012. IT HAS ALSO BEEN REMOVED FROM THE BU LAW WORKING PAPER SERIES.
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Abstract:    

What is the value-added to a firm from the firm-specific information possessed by independent directors (IDs)? Since the flow of information inside a firm is controlled by management, IDs suffer potentially from an information deficit. Lower this information deficit, greater the effectiveness of monitoring by IDs and greater the value added by IDs. We formalize this argument and use a natural experiment to provide empirical support. Following an unexpected corporate governance failure in India in January ’09 that increased the risks from being an ID, IDs resigned from other Indian firms en masse. The stock price reaction to such resignations provides us an exogenous measure of the value of the information possessed by the ID. We find the four-day cumulative abnormal return (CAR) surrounding these resignations to be -1.37%. Since IDs sitting on the audit committee and possessing business/accounting degrees can acquire and process firm-specific information better, the CAR is disproportionately more negative when such IDs resign. Finally, the CAR is positive in firms where an ID continues in his/her position.

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Suggested Citation:
DOCUMENT REMOVED FROM SSRN ON 0CTOBER 1, 2012. A LATER VERSION WILL BE RESUBMITTED IN THE FUTURE.

Chakrabarti, Rajesh; Subramanian, Krishnamurthy and Tung, Frederick, The Firm-Value of Information Possessed by Independent Directors: Evidence from a Natural Experiment (February 26, 2012); Boston University Law & Economics Paper No. 12-21; Boston University School of Law Public Law & Legal Theory Paper No. 12-21.. Available at SSRN: http://ssrn.com/abstract=2024295 or http://dx.doi.org/10.2139/ssrn.2024295.

Contact Information

Rajesh Chakrabarti
Indian School of Business
Hyderabad, Gachibowli 500 019
India
91-40-2318-7157 (Phone)
91-40-2300-7032 (Fax)
Home Page: http://www.isb.edu/faculty/RajeshChakrabarti/

Email: rajesh_chakrabarti@isb.edu

Krishnamurthy Subramanian
Indian School of Business
Hyderabad, Gachibowli 500 019
India
91-40-2318-7167 (Phone)
91-40-2300-7032 (Fax)

Contact Information

Frederick Tung
Professor of Law

Boston University School of Law
765 Commonwealth Avenue
Boston, MA 02215
United States

Phone: (617) 358-6184

fredtung@bu.edu

 

 

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