The Role of Nonaffiliated outside Directors in Monitoring the Firm and the Effect on Shareholder Wealth

The paper addresses the issue of the importance of independent, outside directors in monitoring the affairs of the firm. There is much debate about whether nonaffiliated directors are more supportive of the shareholderinterest hypothesis or the management entrenchment hypothesis. In this study of 1,026 announcements of the appointment of independent outside directors between 1990-1994, the author finds statistically significant cumulative abnormal returns during the two-day window of the announcement. However, the pattern of returns is nonmonotonic in nature in regard to the outside directors already in place. After a critical mass of outside directors is assembled, the addition of another director is likely to produce little or nothing in the way of positive abnormal returns.