Hiring Cheerleaders: Board Appointments of "Independent" Directors
We provide evidence that firms appoint independent directors who are overly sympathetic to management, while still technically independent according to regulatory definitions. We explore a subset of independent directors for whom we have detailed, micro-level data on their views regarding the firm prior to being appointed to the board: sell-side analysts who are subsequently appointed to the board of companies they previously covered. We find that boards appoint overly optimistic analysts who are also poor relative performers. The magnitude of the optimistic bias is large: 82.0% of appointed recommendations are strong-buy/buy recommendations, compared to 56.9% for all other analyst recommendations. We find that appointed analysts' optimism is stronger at precisely those times when firms' benefits are larger, and that appointing firms increase earnings management, and perform poorly, following these board appointments.
We would like to thank Joakim Bang, Brad Barber, Nick Barberis, Sugato Bhattacharya, John Campbell, Josh Coval, Simon Gervais, Gustavo Grullon, Kathleen Hanley, Ayla Kayhan, Bruce Kraus, Alexander Ljunqqvist, Ulrike Malmendier, Jennifer Marietta-Westberg, Cade Massey, Matt Spiegel, Erik Stafford, Jeremy Stein, Jake Thomas, Steen Thomsen, Sheridan Titman, Lori Walsh, and seminar participants at Emory, Harvard Business School, Helsinki School of Economics, Northeastern University, Oxford University, University of Melbourne, University of New South Wales, the Texas Finance Festival, the Yale SOM Behavioral Sciences Conference, the American Finance Association (AFA) meetings, the European Finance Association (EFA) meetings, the Singapore International Conference on Finance, the Families, Networks, and Firms Conference at Thammasat Business School, and the United States Securities and Exchange Commission (SEC) for helpful comments. We also thank Alex Tang for excellent research assistance. In addition, we are grateful to BoardEx and Linda Cechova for providing firm board data. We also thank Alex Tang for excellent research assistance. In addition, we are grateful to BoardEx and Linda Cechova for providing firm board data. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Lauren Cohen & Andrea Frazzini & Christopher J. Malloy, 2012. "Hiring Cheerleaders: Board Appointments of "Independent" Directors," Management Science, INFORMS, vol. 58(6), pages 1039-1058, June. citation courtesy of