Board Independence and Corporate Governance: Evidence from Director Resignations

Board Independence and Corporate Governance: Evidence from Director Resignations. (May 2005) Manu Gupta, B.E., South Gujarat University; M.I.B., Indian Institute of Foreign Trade Chair of Advisory Committee: Dr. L. Paige Fields As evident from recent changes in NYSE and Nasdaq listing requirements, board independence is considered an important constituent of firms’ corporate governance structures. However, the empirical evidence regarding the impact of board structure on firm performance is mixed. Since firms employ a variety of governance mechanism to control agency problems, the significance of board independence may depend upon the strengths of other governance mechanisms. I study the importance of board independence from the viewpoint of an investor by examining the market reaction to board member resignation announcements. I then examine this market reaction in the context of each firm’s existing governance structure and business environment. I find that investors react more negatively when an outside director resigns from the board than when an inside or gray director resigns. More importantly, I find that investor reaction to outside director resignation is less negative when insider or non-affiliated blockholder stock ownership is high. This evidence suggests that board independence and insider ownership and non-affiliated blockholder