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Board Independence and Managerial Authority

Sat, April 18, 11:15am to 12:30pm, Renaissance Asheville Hotel, TBA

Abstract

The imposition of the Sarbanes Oxley Act and the NYSE/NASDAQ regulations boosted the proportion of independent directors serving on the boards of directors of U.S. firms. This paper examines the implication of increased independence following SOX on managerial authority and entrenchment within the firm. We focus on the sub-group of firms who were not complying with the board independence requirement prior to SOX and became complying afterwards. We demonstrate that the appreciation in board independence post-SOX significantly inflates both managerial compensation and the likelihood of CEO duality. We also highlight a positive association between board independence and managerial entrenchment during both the pre- and post-SOX periods. Accordingly, this paper proposes that the imposed board composition requirements diminished board monitoring efficiency and boosted the CEO dominance and control over the firm. We suggest that our results are based on an off equilibrium phenomena in which companies were obliged to alter their endogenously determined board structure.

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