Board Hierarchy, Independent Directors, and Firm Value:

• In Event: Corporate Governance and Boards of Directors

Abstract

A large number of studies have examined the role of board characteristics in corporate governance. In particular, there is evidence that the percentage of independent directors is positively associated with firm value. However, there is little research on how independent directors contribute to firm value. Using unique data of board hierarchy from China, we shed light on this process by examining how firm value varies with the rankings of independent directors within a company board. We argue that higher rankings, representing higher status and power in a social group, reflect more freedom that directors feel in expressing opinions and providing input and larger influence that directors can exert on the other directors of the same board. We find that higher rankings of independent directors are associated with higher firm value, as measured by Tobin’s Q. Further, we find corroborative evidence that higher rankings of independent directors are associated with less earnings management and lower cost of equity. Overall, our results suggest that independent directors add more value to a firm when they are empowered in group decision making.

Authors

• Jigao Zhu, University of International Business and Economics

• Kangtao Ye, Renmin University of China

• Jennifer Wu Tucker, University of Florida

• Kam C Chan, Western Kentucky University