The effect of independent directors on firm value

Abstract

Separation between management and ownership is the main reason for the rise of the different agency problems faced by many firms. The failure of giant firms such as, Enron and WorldCom, gave rise to a series of efforts to improve corporate governance. Reforms are imposed on companies in order to protect shareholders’ rights. A major requirement was to increase the number of outsiders serving on the board of directors. However, the effectiveness of independent directors was and still is an important topic for researchers especially after the rush of adding more outsiders post the Sarbanes-Oxley act. The research paper investigates whether current board structures are becoming more effective than before. And to investigate whether increasing the independent directors for a high managerial entrenched firm will have a higher impact on shareholders’ wealth. The findings support the fact that when management is highly entrenched, an increase in outsiders will lower the negative impact of percentage independent directors on the firm value.