Board composition, CEO turnover and firm value

Abstract

This paper tests the effect of an exogenous shock, the Sarbanes-Oxley Act (SOX) of 2002, on the structure of corporate boards and their efficiency as a monitoring mechanism. The results suggest an increase in the participation of independent directors at the expense of insiders. Consequently, we investigate the implications of board composition changes on CEO turnover and firm value. We document a significant reduction in CEO turnover in the post-SOX period. We also demonstrate that, after SOX, a board dominated by independent directors is less likely to remove a CEO owing to poor performance. Finally, we highlight a negative association between the change in board composition and firm value. Contrary to the legislators' objectives, we suggest that the change in board structure brings about inefficient monitoring and promotes an unfavourable trade-off between independent directors and insiders.