Why corporate board insiders still matter: Evidence using aggregate earnings shocks

Abstract

Corporate governance research lacks clarity on why, when, and what types of firms appoint non-CEO board insiders because of the primary academic focus on board independence. While executive monitoring is relevant, it is equally salient to understand why firms appoint non-CEO insiders to the boards. This concern is especially relevant when firms face financial difficulties during periods of macro hardship. Using the corporate socialization theory, we suggest that board insiders likely generate firm-specific private information by utilizing their long-tenured firm-focused corporate experience. It would result in a unique form of non-fungible expertise that firms would find valuable during macro hardships. Employing a difference-in-difference research design, consistent with our theory, we document that when firms experience a cross-country macro hardship such as an aggregate earnings shock, they appoint long-tenured and firm-focused non-CEO board insiders. We further show that financially distressed firms have a higher demand for such directors.