Are All Independent Directors Equally Informed? (No they are not)

Fascinating research paper with the above title. Few surprises here, but fascinating. Abstract:

We study the impact of social networks on the ability of independent directors to obtain private information from their firms’ executives. We measure the amount of firm-specific information possessed by directors using the returns they earn from trading their firms’ stocks. The results show that independent directors who are socially connected to their firms’ senior executives on average earn a significantly higher return than that made by unconnected directors in sales transactions. The effect of social networks is only significant among firms in which the information acquisition cost is relatively high. Independent directors make lower returns when their information source in the firm breaks due to the departure of the connected senior executives. Connected independent directors also conduct more stock sales prior to announcements of bad news compared to unconnected independent directors. Overall, our results suggest that independent directors gain access to important firm-specific information through their social connections to firms’ senior executives.

The full paper can be downloadedf from BDTI's Data Library, Global / Integrity, Fraud Ethics folder.

The Board Director Training Institute (BDTI) is a "public interest" nonprofit in Japan dedicated to training about directorship, corporate governance, and related management techniques. It is certified by the Japanese government to conduct these activities as a regulated nonprofit. Read a summary about BDTI here, and see a menu of its services for both corporations and investors here.

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