Chakrabarti Tung 2011

THE FIRM-VALLUE OF INFORMAT
N
TION POS
SSESSED BY
INDEPENDE
ENT DIRE
ECTORS:
EVIDENCE
E FROM A NATURA
AL EXPER
RIMENT
Bo
oston Univerrsity School of Law Worrking Paper No. 12-21
(May 5, 20 12)
Rajesh
h Chakraba
arti
(Indian Sc
chool of Bussiness)
Krishnamu
K
rthy Subra
amanian
(Indian School
S
of Business (IS
SB), Hydera
abad)
Fred
derick Tung
g
Bo
oston Unive
ersity Scho
ool of Law
This paperr can be do

ownloaded w
without cha
arge at:
http://ww
ww.bu.edu/law/faculty//scholarship
p/workingpa
apers/2012
2.html
The Firm-value of Information possessed by Independent Directors:

Evidence from a Natural Experiment*
Rajesh Chakrabarti

Krishnamurthy Subramanian

Frederick Tung
Boston University Law School
February 26, 2012

Abstract
What is the value-added to a firm from the firm-specific information possessed by independent directors
(IDs)? Since the flow of information inside a firm is controlled by management, IDs suffer potentially from an
information deficit. Lower this information deficit, greater the effectiveness of monitoring by IDs and greater
the value added by IDs. We formalize this argument and use a natural experiment to provide empirical support.
Following an unexpected corporate governance failure in India in Jan 09 that increased the risks from being an
ID, IDs resigned from other Indian firms en masse. The stock price reaction to such resignations provides us an
exogenous measure of the value of the information possessed by the ID. We find the four-day cumulative
abnormal return (CAR) surrounding these resignations to be -1.37%. Since IDs sitting on the audit committee
and possessing business/accounting degrees can acquire and process firm-specific information better, the CAR
is disproportionately more negative when such IDs resign. Finally, the CAR is positive in firms where an ID
continues in his/her position.
Key Words: Board of Directors, Corporate Governance, Independent Directors
JEL Codes: G34
We would like to thank Steven Kaplan, John Karpoff, Sanjay Kallapur, Vikas Mehrotra, Ron Masulis, N Prabhala, Raghuram Rajan,
Bernand Yeung, and Luigi Zingales as well as conference participants at the 2011 Asian Finance Conference at the University of New
South Wales, the 2011 Frontiers in Finance conference at the University of Alberta, the ISB Summer Research Workshop 2011 and the
Olin School of Business Corporate Finance Conference for helpful comments and suggestions. We also acknowledge able research
assistance from Naresh Kotrike and Chandra Sekhar Mangipudi. All remaining errors are our responsibility.
Electronic copy available at: http://ssrn.com/abstract=2024295
The Firm-value of Information possessed by Independent Directors:

Evidence from a Natural Experiment
February 26, 2012

Abstract
What is the value-added to a firm from the firm-specific information possessed by independent directors
(IDs)? Since the flow of information inside a firm is controlled by management, IDs suffer potentially from an
information deficit. Lower this information deficit, greater the effectiveness of monitoring by IDs and greater
the value added by IDs. We formalize this argument and use a natural experiment to provide empirical support.
Following an unexpected corporate governance failure in India in Jan 09 that increased the risks from being an
ID, IDs resigned from other Indian firms en masse. The stock price reaction to such resignations provides us an
exogenous measure of the value of the information possessed by the ID. We find the four-day cumulative
abnormal return (CAR) surrounding these resignations to be -1.37%. Since IDs sitting on the audit committee
and possessing business/accounting degrees can acquire and process firm-specific information better, the CAR
is disproportionately more negative when such IDs resign. Finally, the CAR is positive in firms where an ID
continues in his/her position.
Key Words: Board of Directors, Corporate Governance, Independent Directors
JEL Codes: G34
1. Introduction
Governance reforms over the last decade1 have placed increased emphasis on monitoring by independent
directors (IDs)2, a faith based on the IDs as diligent monitors with no significant relationships with the firm or
its management. Yet, the quality of monitoring by the IDs depends critically on their access to crucial firmspecific information, an area where they are at a significant disadvantage vis--vis the insiders. Since
management controls the flow of information, the degree of this information deficit or asymmetry may
endogenously become disproportionately more in decisions that most materially affect the agency costs between
shareholders and managers.
Prior academic research has focused primarily on whether de jure IDs are de facto independent by
examining their effective linkages with management. Byoung-Hyown and Kim (2009) show that de jure IDs are
often socially connected with the CEO, which compromises their independence de facto.3 Cohen et al. (2010)
suggest that IDs in mutual funds are, in fact, often incompetent cheerleaders (in their case, poorly performing
analysts). In contrast, the role of firm-specific information possessed by IDs in administering their monitoring
and advisory roles has received little attention.4 In this paper, we argue that apart from the underlying
relationships that may compromise conscious neutrality, an IDs de facto independence stems from the firmspecific expertise/information acquired over time by the ID.
We ask the following simple, yet fundamental, question: what is value does the firm derive from the firmspecific information possessed by IDs? In other words, what is the economic value-added to a firm by an ID
who possesses firm-specific information that lends teeth to his/her monitoring and advisory role vis--vis an ID
who is a nominal monitor/advisor? We develop a simple theoretical model and exploit a natural experiment to
theoretically and empirically study this question.
The theoretical model formalizes the following argument. An ID suffering from information deficit cannot
be de facto independent as a director, because even with the most ethical and selfless motivations, her decisions
if they are based primarily on information presented by the management would necessarily be biased
towards management. An ID is likely to refrain from opposing/challenging a CEOs decision if she has not
acquired the necessary firm-specific information. Her real power to question/oppose the CEO's decision requires
that she is well equipped with firm-specific information. That IDs can indeed possess firm-specific information
1
Including the Sarbannes-Oxley Act, NYSE and NASDAQ listing requirements and the recent Dodd-Frank Act
Under these new rules, central governance roles are reserved for IDs. For public company boards, a majority of directors
are required to be independent. In addition, three crucial board committees are required to be comprised solely of
independent directorsthe audit committee, which hires and manages the firms outside auditor; the compensation
committee, which sets executive compensation; and the nominating committee, which selects director nominees.
3
Although corporate governance reforms such as the Sarbanes-Oxley legislation in the U.S. and the Cadbury committee
recommendations in the U.K. have stipulated norms for formal board independence, their inadequacy can be highlighted by
the spectacular failures of WorldCom and others. Using all the current yardsticks, the board of WorldCom would have
qualified as independent with even the chairman and CEO positions being separated from one another. Yet, as Kaplan
(2005) points out, the WorldCom directors were not truly independent (p7).
4
Harris and Raviv, 2010 and Duchin, Matsusaka & Ozbas, 2010 are exceptions that we discuss below.
2
has, in fact, been recently established by Ravina and Sapienza (2009). Therefore, we argue that IDs make
themselves valuable to the firm's shareholders by acquiring firm-specific information and thereby making
themselves independent de facto. Our argument is in spirit similar to the one provided by Aghion and Tirole
(1997) who distinguish formal authority from real authority by arguing that real power over decisions stems
from context-specific information.
Estimating the stock market reaction to ID exits would be a natural way of assessing the value of
information possessed by IDs since new IDs replacing them are unlikely to possess their firm-specific
information. However, a number of confounding factors would hobble such an exercise. First, both an exiting
ID and the firm typically attempt to massage the true information underlying the IDs exit in order to reduce any
negative impact of the same on the firm's stock price (Bar-Hava and Segal, 2010). Therefore, the true impact of
the firm-specific information the ID has acquired will not be fully revealed in a typical exit. Second, exogenous
events causing increases in an IDs responsibilities may have led to the exit.5 Since the presence of busy IDs on
a firms board is correlated with its performance,6 such changes in ID characteristics at the time of the exit
confound an assessment of the value of the firm-specific information possessed by the ID. Third, firm-specific
events coinciding with the time of the ID exit may have led to the exit. Therefore, the stock market reaction to
such events would confound the value added by the firm-specific information acquired over time by the ID.
These identification problems can be side-stepped if we could find an exogenous shock large enough to
cause enough ID exits to provide us with a statistically meaningful sample. If the ID exits are motivated by an
external shock, it severs the possible link between ID exits and firm-specific events, on the one hand, and that
between the exits and change in ID characteristics on the other hand. Two simultaneous events that occurred in
India in January 2009 provide us precisely such a natural experiment.
The natural experiment in question arose from two simultaneous events that combined together to produce
the perfect storm: (i) the sudden and unexpected failure of Indias fourth largest software firm, Satyam
Computers, after the revelation of a massive corporate fraud, that made headlines; and (ii) the unrelated
prosecution of eminent investment banker, Nimesh Kampani, in Dec 08 for events that occurred in 2000 at a
company a year after he had left its board. The fiasco at Satyam Computers led to IDs in the firm being subject
to legal harassment and public ridicule. Since the fiduciary responsibilities/legal liabilities of outside directors
(as distinct from those of insiders) are not well defined in Indian corporate law, Indian IDs potentially face legal
liabilities that are no different from those of insiders. Indian IDs can, in fact, be arrested and put behind bars
5
For example, on her appointment to President-elect George W. Bush's cabinet, Elaine L. Chao, who was one of the 10
busiest directors among large U.S. corporations then, resigned from her directorships at C.R. Bard, Clorox, Columbia/HCA
Healthcare, Dole Foods, Northwest Airlines, and Protective Life (Fich and Shivdasani, 2006).
6
Beasley (1996) reports that the probability of committing accounting fraud is positively related to the average number of
directorships held by outside directors. Core, Holthausen, and Larcker (1999) report that busy directors set excessively high
levels of CEO compensation, which in turn leads to poor firm performance. Fich and Shivdasani (2006) find that firms with
busy boards, those in which a majority of outside directors hold three or more directorships, are associated with weak
corporate governance. Wagner (2010) finds that busy directors are more competent and that this competence affects firm
performance positively.
when adverse events occur in the firm they are associated with.7 The Nimesh Kampani episode also brought into
focus such liabilities faced by IDs. This institutional background fuelled the fear created by the events of Dec
08 Jan 09. Worried that a lifetimes reputation could be tarnished because of the hard-to-detect actions of
unscrupulous insiders, IDs resigned en masse from other firms, i.e., those not involved in either of the two
scandals.8
**** Insert Figure 1 here ****
Figure 1 depicts the number of listed firms in which IDs resigned in the 11 months starting from Dec 08.
The extraordinarily large number of firms that experienced such resignations in Jan 09 is unmistakable. Given
the unanticipated nature of the event, the resignations could not have been due to an increase in the
responsibilities of specific IDs. Nor could the exit have been motivated by firm-specific news coinciding with
the timing of the exit. In fact, among the sample of IDs that held multiple ID positions, some IDs selectively
resigned from a subset of these firms, which indicates that the exits that were motivated by the negative firmspecific information acquired over time.
Our empirical strategy in measuring the value of the information possessed by an ID is to examine the
stock-price reactions to the ID exits following the Satyam fiasco. Since the Satyam fiasco was completely
unanticipated and the ID exits occurred primarily due to the same, unlike ID exits in normal times, the full value
of the information underlying the exit should get impounded into the stock price. We find this stock price
reaction, as measured by the four-day CAR surrounding such resignations, to be -1.37%. We estimate this effect
after controlling for: (i) the effect of traditional value added by IDs through their monitoring and advisory
roles, i.e. without the complementary support provided by the firm-specific information possessed by the ID; (ii)
any panic reactions to ID exits; (iii) observed and unobserved firm and director characteristics; and (iv) industry
fixed-effects and the industry return in Jan 09 to address the possibility that the negative abnormal returns were
driven by the technology sector undergoing a reputation loss in the wake of the Satyam fiasco. Therefore, we
infer this figure to be the market's estimate of the value attributed to a de facto ID when compared to the new,
purely de jure ID, who would replace the departing directors and would need time to develop, in terms of firmspecific information, into de facto directors. Our finding is reinforced by the fact that in cases of directors on
multiple boards, when the directors selectively exited firms, the firms where they continued to stay on actually
produced significantly positive CARs. So clearly under the circumstances not only did an ID exit send a
negative signal about the company, but ID retention also meant good firm-specific news for the market.
Apart from measuring the firm value impact of an ID exit under this special condition, we find evidence that
the stock price reaction is significantly more for IDs to sit on audit committees and those who possess and
7
More recently in late 2011 when a corporate-run hospital, AMRI, in Kolkata, India, had a devastating fire with evidence
of insufficient precautions, the independent directors were put behind bars along with the executive directors.
8
In fact, prominent Indian shareholder activist Prithvi Haldea notes: Many (independent directors) are worried that
their life's reputation can be ruined overnight and they in fact not only become persona non-grata, but also invite media
ridicule and government prosecution. Is the fee they earn enough for them to expose themselves to such risks, is a question
many are asking? Financial Express, 21st Jan 2009.
educational background that is related to business and/or accounting. We interpret this finding as suggestive of
the market imputing greater value to these directors as they are likely to be better informed and/or in a better
position to understand and use the information at their disposal in their monitoring of the management.
This paper makes a simple but fundamental point. It is the firm-specific information acquired by an ID that
provides her de facto independence and thereby enhances her value to the firms shareholders. In addition to
examining the value of IDs themselves,9 previous studies have made an important contribution by highlighting
the weaknesses involved in formal definitions of director independence (see Byoung-Hyown and Kim (2009)
and Cohen et al. (2010) mentioned above). We complement these studies by arguing that the difference between
de jure and de facto independence also stems from the firm-specific information acquired by the director and
estimate the economic value of this acquired information to the firms shareholders. By examining the insider
trading behavior of independent and inside directors, Ravina and Sapienza (2009) find that IDs possess as much
firm-specific information as the insiders. While they examine the value derived by IDs for themselves, as
measured by their trading profits, we examine the value added to the firm from the firm-specific information
possessed by the IDs because of the increased effectiveness in administering their role as monitors/advisors.
Our study relates more directly to prior studies examining the effect of information costs on corporate
boards. Harris and Raviv (2010) determine optimal allocation of control between insiders and outside directors
on the board where the controlling party delegates decision-making to the other party. They show that
shareholders can sometimes be better off with an insider-controlled board when the costs of acquiring
information are relatively high for the outside directors. Duchin, Matsusaka, and Ozbas (2010) use analyst
coverage as a proxy for the costs incurred by outsiders in acquiring firm-specific information and find that
adding IDs adds value for firms with low information costs, but diminishes value for firms where information
costs are high. However, we find the market assessed value of the firm-specific information possessed by an ID
does not vary with analyst coverage. Since IDs have much greater access to information than analysts, a firm for
which analysts have difficulties in acquiring information may yet be one where IDs can acquire the necessary
firm-specific information with relative ease. The fact that analyst coverage is not correlated with the marketassessed value of information possessed by IDs is consistent with this possibility.
The paper is organized as follows. The next section describes the background for this study by examining
the corporate governance scandal at Satyam Computer Limited and the subsequent ID resignations. After
describing our data in the fourth section, we present and discuss our results in the fifth section. We conclude by
summarizing our findings and pointing to directions for further research.
Weisbach (1988), Bhagat and Black (1999, 2002) and Yermack (1996) offer three contrasting views for the value added
by independent directors. Nguyen and Nielsen (2009) use the sudden deaths of directors as a clean natural experiment and
find that IDs indeed add value to firms through their monitoring and advising roles.
2. Background
In this section, we provide the background information required to understand our empirical setting.
2.1 The corporate governance scandal at Satyam

Satyam Computer Services Limited (hereafter Satyam), the Hyderabad-based Indian software company,
was founded in 1987 by B Ramalinga Raju and his brother B Rama Raju. In the two decades since its inception,
Satyam grew rapidly into a $4 billion enterprise. By 2008, it was the fourth largest Indian software company
with operations around the globe and reputed clients such as the World Bank, GE, etc. Satyams Chairman, B
Ramalinga Raju, had acquired a stellar reputation as an entrepreneur, corporate citizen and media personality.10
Months before the scandal, Satyam was awarded the Golden Peacock Global Award for Excellence in Corporate
Governance by The World Council for Corporate Governance. Previously, Investor Relations Global Rankings
(IRGR) had rated Satyam as the company with Best Corporate Governance Practices for 2006 and 2007. The
non-executive directors on its board included academics from India and abroad such as Prof. Krishna Palepu of
Harvard Business School, the then Dean of the Indian School of Business, industry experts such as Vinod
Dhams (the inventor of Pentium chips at Intel), and a former top civil servant. In short, on the eve of its crisis,
Satyam shone as one of the brightest jewels in India's corporate crown.
Satyam came under media spotlight on Dec 16th 2008 when its board unanimously approved the
acquisition of two family owned companies using its $1.2 billion cash holding. This particular meeting was
chaired by the then Dean of the Indian School of Business, who was an ID on the board. However, the
acquisitions were called off a few hours later when institutional investors particularly the foreign institutional
investors in the US resisted by labeling it a self-dealing transaction.
Three weeks later, on the morning of Jan 7th 2009, Satyam's Chairman Ramalinga Raju disclosed that the
firm had been fudging its accounts for several years with the cooperation of the firm's auditor Price Waterhouse
Coopers (PWC) and that its much-vaunted $1.2 billion cash holding was largely non-existent; the cash holding
was the result of a long-drawn accounting fraud.11 Satyams shares fell by 77.47% that day and the benchmark
market indices BSE Sensex and Nifty fell by 7.25% and 6.18% respectively (4.43% and 4.19% respectively
after removing the effect of Satyam).
Ramalinga Raju has been in police custody ever since together with two auditors from PWC. Apart from a
sustained barrage of vilification and aspersions on their competence and character in the national and
international media, Satyams directors have since then been subject to an intense grilling by the Criminal
10
Raju had served as Chairman of the National Association of Software and Service Companies (NASSCOM) and had
been a member of the International Advisory Panel of Malaysia's Multimedia Super Corridor. Among the many awards that
he had received, he was awarded the Corporate Citizen of the Year award during the Asian Business Leadership Summit
held in Hong Kong in 2002, was named as the IT Man of the Year by Dataquest in 2001 and was conferred the
Entrepreneur of the Year Award by Ernst & Young, India in 2000.
11
It was later revealed by Raju that the transactions proposed on Dec 16th were an attempt to close the loop on the longstanding accounting fraud.
Bureau of India (CBI) and the federal government's Serious Fraud Investigation Office (SFIO). Class-action
lawsuits have also been filed by U.S. investigators.12 In sum, the realization of the possibility of civil and/or
criminal liabilities posed a significant cost to Indian IDs after the Satyam fiasco.
2.2 Institutional differences in outside directors liabilities vis--vis the U.S.

In order to rationalize the events following the Satyam fiasco, it is important to understand the differences
in the liabilities faced by outside directors in India vis--vis those faced by the outside directors in the U.S.
These differences stem mainly from the fact that neither listing standards in the Indian stock exchanges nor The
Indian Companies Act (1956) differentiate the role of outside directors vis--vis that of the internal (executive)
directors, promoter-affiliated directors or the nominee directors. Furthermore, neither listing standards nor The
Indian Companies Act defines the fiduciary responsibilities/ legal liabilities faced by IDs with any real
precision. In fact, in his interviews of Indian IDs post the Satyam fiasco, Khanna and Mathew (2010) finds that
the IDs on Indian corporate boards believed that the current scope for ID liability was very high and included a
bona fide, non-trivial risk of criminal liability. Such liability was often arbitrarily imposed and was not offset by
adequate directors and officers insurance coverage. 13 Furthermore, Khanna and Mathew (2010) found that
IDs desired: (i) seemingly basic protections against being served arrest warrants based on claims of corporate
malfeasance clearly outside the IDs control, such as bounced checks and factory accidents; and (ii) clear safe
harbors that would insulate them from liability for reliance on information provided by auditors and
management.
2.3 The unrelated prosecution of an eminent ID

Indian IDs fear of legal liabilities in 2009 was confirmed by another near-simultaneous but unrelated
development in late 2008. Nimesh Kampani, one of India's leading investment bankers, had served as an ID on
the board of Nagarjuna Finance Limited (NFL) for approximately one year from 1998 to 1999.14 The promoters
and executives of NFL were later charged for failing to repay depositors nearly US $20 million during 2001-02.
Surprisingly however, in December 2008, just a couple of weeks before these Satyam scandal broke out, the
particular state government also issued an arrest warrant after laying criminal charges against Kampani. The
arrest warrant was issued despite the fact that Kampani had left the board long before any of the allegations
surfaced. Kampani managed to avoid arrest and jail time by remaining in Dubai for nine months until a state
court in October 2009 stayed the proceedings against him.
2.4 The setting for a natural experiment
12
Class-action suits by shareholders are not allowed in India.

Criminal liabilities on external directors can be brought about under the aegis of the clause 49 stock exchange listing
agreement, The Indian Companies Act, 1956 and/or provisions of the Indian Penal Code that cover breach of trust, theft and
cheating. Such criminal liabilities may trigger arrests and, potentially, convictions for directors.
14
C.R. Sukumar and B. Kalesh, Kampani Surprised at Nagarjuna Probe, LIVEMINT, Dec. 23, 2008, available at
http://www.livemint.com/2008/12/22234706/Kampani-surprisedat-Nagarjuna.html.
13
The Satyam fiasco, together with the Nimesh Kampani incident, provides us with a clean, unregulated
corporate governance failure that was exogenous to the other firms. First, the scandal was completely
unexpected before it happened. Second, since the scandal involved a firm that was quite feted for its corporate
governance practices and was in an industry that has been the internationally recognized poster child for its
professionalism and competition, the corporate governance shock came from a completely unexpected quarter.
As a result, we do not expect any effect on the variables of interest before the scandal. Third, since the scandal
unravelled within a short time span of three weeks, we are able to pinpoint the precise point in time when the
effects would manifest. Fourth, as we explain shortly, this incident led to a re-assessment of risks associated
with being an ID in India. Fifth, ID exits from other firms those that were not involved in either scandal are
unlikely to be driven by unobserved, firm-specific factors coinciding with the precise time of the change since
they were due to an unanticipated shock that was external to the firms in question. Sixth, the IDs whose exits we
examine were themselves not associated with either scandal. Therefore, the exits could not have been driven by
unobserved, director specific factors coinciding with the exit. Therefore, the event provides us a clean natural
experiment.
3. A simple model
We develop a simple model to formalize the inclusion that the firm specific information acquired by an ID
enables her monitoring and advisory roles and thereby adds value to the firm. We then show that the firm
specific information acquired by the ID determines the IDs decision to either exit from an ID position or to
retain the same following the Satyam fiasco. Finally, we show that the IDs decision conveys a signal to the
market about the quality of the firm as perceived by the ID, which in turn leads to a positive or negative stock
price reaction.
3.1 Setup and timing of events

Consider a principal-agent relationship where the ID acts as the principal on behalf of the firm's shareholders and the
firm's CEO acts the agent of the shareholders. The ID has the formal authority to approve projects suggested by the
CEO and can, therefore, decide not to approve a project suggested by the CEO. However, unless the ID is wellinformed about the firm, she will rubberstamp whatever project the CEO chooses. We formalize this idea in the
following way. Suppose that the CEO of the firm can suggest either of two projects - good projects or bad
projects. A good project is defined as a project that enhances shareholder value, whereas a bad project is defined
as one that provides private benefit to the CEO, but destroys shareholder value. If a firm undertakes the good
project, the equity value equals 1. If the firm takes up the bad project, the equity value equals 0.
The probability of the firm taking up the bad project depends on whether or not the ID is informed and the
nature of the firm. The CEO takes up the bad project if the ID is uninformed in which case the CEO has a carte
blanche to undertake the project of his choice. Since the bad project provides private benefits to the CEO, she
will always take up the bad project is the ID is uninformed.
7
We assume the firms in the economy to be of two types - good firms and the bad firms. The proportion of
good firms is and the proportion of bad firms is where . The interests of the CEO of the good
firm (hereafter good CEO) are better aligned with those of the firm's shareholders than that of the CEO of the
bad firm (hereafter bad CEO). We model this by assuming that the probability of the good (bad) CEO taking
up the bad product is , where and > .
If the ID exerts effort , she becomes fully informed with probability about the firm. The private
cost to the ID of acquiring the firm-specific information is
, where captures the IDs ability to acquire and
process firm specific information; a higher thus corresponds to a more capable ID. If the ID is fully informed,
she can ensure that the CEO undertakes the good project and the bad project rejected irrespective of the nature
of the firm. With a probability , he remains uninformed. We describe the private costs and benefits faced
by IDs shortly.
**** Insert Figure 2 here ****
The timeline of events, which is shown in Figure 2, is as follows. We divide the timeline into the pre-and
post-Satyam fiasco periods which correspond to the time period till Dec 08 and Jan 09 - Dec 09 respectively.
An ID joins the firm sometime before Dec 08 and invests effort to become informed about the firm. After the
ID invests effort, the CEO suggests a project and with the approval of the ID, either the good or the bad project
is implemented. Once the Satyam shock manifests on 08 Jan 09, the ID decides either to continue as an ID or
resign based on his assessment of the expected costs and benefits from the same. The market observes the IDs
action and infers the same as a signal based on the firm specific information possessed by the ID. Finally,
project cash flows accrue in Dec 09. We assume the project cash flows accrue after the IDs decision to stay or
resign to capture the fact that the uncertainty about the firm's prospects and the IDs firm-specific information
drive the ID exits.
3.2 Costs and benefits of directorship positions

Fama (1980) and Fama and Jensen (1983) argued that prestige, networking, and learning opportunities are
primary reasons why individuals serve as outside directors on corporate boards. They also contend that there
exists a labor market for outside directors that functions on the basis of reputation. This thesis is verified by
several empirical studies. Ferris, Jagannathan, and Pritchard (2003) show that directors associated with firms
that perform better receive more offers for ID positions. Brickley, Linck, and Coles (1999) show that CEOs that
perform well in the year before retirement receive more directorships following their retirement. On the other
hand, CEOs of firms who cut dividends (Kaplan and Reishus (1990)), directors who resign following
bankruptcy filing (Gilson (1990)) and directors of firms that restate earnings (Srinivasan (2005)) are likely to
receive relatively fewer directorships. As well, outside directors build reputation through the performance of the
companies on whose board they serve, creating opportunities for more (and more prestigious) directorships for
themselves. Outside directors receive financial rewards for good firm performance too. Yermack (2004) shows
8
that for non-executive members of S&P 500 boards, there is, on average, a $285,000 change in wealth for one
standard deviation improvement in firm performance, roughly a gain of 11 cents per $1,000 rise in firm value.
Thus, the benefits to outside directors are closely linked to the performance of the firms on which they serve as
outside directors.
A directorship position also entails direct costs in the form of time and effort commitments, and indirect
costs such as the risk of reputational damage and potential legal liabilities. However, these costs do not very
with firm performance. Thus the expected cost and benefits of an ID j in firm i may be formalized as:
denotes the equity value of firm I

where
(1)
where denotes the probability of an adverse event in firm i and captures the reputational and
legal costs faced by IDs given an adverse event.
(2)
The cost varies with ID j because the private value placed on reputation would vary from one idea to
another. We assume that .
3.3 Equilibrium effort at acquiring firm-specific information

Since the ID becomes informed with probability and the CEO chooses the good project, the realized
equity value in this case equals one. The ID is uninformed with probability in which case the CEO
chooses the good project with a probability , which produces an equity value of 1, and chooses the bad project
with probability , be generates an equity value of zero. Therefore, the expected equity value given by

(3)
The ID chooses the optimal effort to maximize his expected benefits net of the expected costs from holding
the ID positions as well as the private cost of effort:

(4)
where the second term within the maximization operator follows from the likelihood of the adverse event being
equal to the probability of the ID being uninformed times the probability of the bad project being chosen.
Since > , the marginal benefit of the ID acquiring firm-specific information is greater in bad firms than in
good firms. This is because even if the ID is not informed, the good CEO undertakes the good project with a
greater likelihood. In other words, the value of firm-specific information in enhancing the monitoring role of the
ID is greater in poorly governed firms than in well governed firms.
The expected equity value given this optimal effort is given by:

(5)
To ensure that the equity value is greater in the well governed firms than the poorly governed ones, as
documented by Gompers, Ishii and Metrick (2003), we assume that the proportion of benefits from holding ID
positions as well as the costs from the same are bounded as below:

(6)
3.4 The unanticipated shock to costs of ID positions

We argue that post the Satyam fiasco, the costs faced by Indian IDs increased though the benefits from
being an ID remained unchanged. As discussed above in Section 2.1, given the lack of clarity in the fiduciary
responsibilities of outside directors, the Satyam fiasco escalated fears of potential civil/criminal liabilities as
well as the loss of reputation.15 The Satyam fiasco thus engendered worries among the IDs that they could be put
in jail, held legally liable and have their reputations tarnished beyond repair for actions perpetuated without their
knowledge by insiders. Since it was unanticipated, the Satyam fiasco represents an exogenous shock to the cost
of ID services. Thus, it led to an exogenous rise in the costs from cj to . When deciding whether or
not to resign from an ID position, a director trades off the benefits associated with an ID position vis--vis the
attendant costs; note that since the cost incurred in acquiring firm-specific information is sunk by the time the
unanticipated Satyam shock manifests, it does not factor into this decision. Thus, a director stays on a board if
and only if i .
Since the bad CEO chooses the bad project with a greater likelihood, the expected benefits to the ID are
lower in the bad firm than in the good firm. The qualifications good and bad are from the perspective of the ID
based on his firm-specific information; by definition, therefore, this information is unobservable to the market.
We therefore get the first result from the model:
LEMMA: Exits are more likely in firms in which the ID has acquired information that the firm is bad than in the
firm in which the ID has acquired information that the firm is good.
As stated above, since the IDs firm-specific information is unobservable to the market, the market cannot
distinguish ex-ante between the good and bad firms. Therefore, before the ID exits, the market assigns the value
to every firm. However, the IDs decision to stay or exit conveys a signal about the
firm-specific information possessed by the ID. If the ID exits, the market assesses the firm to be a bad (good)
one and assigns the equity value to the same. Since > , the following empirical predictions follow:
HYPOTHESIS 1: Listed Indian firms in which IDs resigned in Jan 09 experience negative abnormal stock returns
following the ID resignation.
HYPOTHESIS 2: Listed Indian firms from which an ID chose not to resign in Jan 09 experience positive
abnormal stock returns.
In instances where the ID possesses greater ability to acquire and process firm-specific information, which
corresponds to higher in the model, the stock market reaction to the ID exit would be disproportionately more
Prominent Indian shareholder activist Prithvi Haldea notes for example: Till Satyam, independent directors used
to take sitting fees and remained on the boards of 4-5 companies without proper knowledge of their functioning. But now
many (independent directors) are worried that their life's reputation can be ruined overnight and they in fact not only
become persona non-grata, but also invite media ridicule and government prosecution. Is the fee they earn enough for them
to expose themselves to such risks, is a question many are asking?
15
10
negative [
. [
Since IDs sitting on the audit committee of the board have greater ability
to acquire and process firm-specific information (Raheja, 2005), we hypothesize that:

HYPOTHESIS 3: Abnormal stock returns following ID resignations would be disproportionately more negative in
listed Indian firms where the ID sat on the audit committee of the board.
Related to the above, directors that possess business/ accounting expertise (as proxied by their MBA, CFA or
CA degrees) are arguably better positioned in acquiring and analyzing firm-specific information Therefore,
those special directors who serve on the audit committee and possess business/ accounting degrees should be
even more valuable as de facto IDs, which leads to our final hypothesis:
HYPOTHESIS 4: Abnormal stock returns following ID resignations would be disproportionately more negative in
listed Indian firms where the resigning IDs possessed business/ accounting expertise and had a monitoring role
on the board.
Note that since the ID exits did not happen because of any firm-specific event coinciding with the exit, they are
not motivated by such an event. Instead, the ID exits were prompted by the firm-specific information acquired
by the ID over a period of time.
4. Data and Sample

4.1 Sample selection
The main sample consists of IDs that resigned from firms listed at the Bombay Stock Exchange (BSE)
between January 8th, 2009 a day after the revelation of the accounting fraud at Satyam and January 31st,
2009. The Appendix details the definition of an ID according to the Securities and Exchange Board of India
(SEBI), which is the Indian equivalent of the Securities and Exchange Commission in the United States. As part
of the compliance requirements, companies listed at the BSE are mandated to file information about all director
cessations along with the date from which the director ceased to be on the board. These cessations are compiled
by the Directors Database (www.directorsdatabase.com).
The above data on director cessations is quite unique, particularly in the context of an emerging market,
since they are based on actual filings made to the exchange by listed companies. The data covers individual
information on all directors in BSE-listed firms including (i) the directors educational qualifications; (ii) the
directors position in the board (for example promoter director, managing director, non-executive director, ID,
etc.); (iii) whether the director satisfies the definition of being independent according to the guidelines laid by
out by the Securities and Exchange Board of India (SEBI); (iv) the other public and private firms in which the
director is a board member; (v) the firms from which the director ceased to be a director; (vi) the date of such
cessation; and (vii) the reason for such cessations (end of nomination, expiration of term, super cession, superannuation, relieved of duty, resignation, etc.).
11
For the purpose of our study, it is important that our sample include only those cessations that are not
anticipated by the stock market. Therefore, for our main sample, we only include from this database those
resignations that occurred after the Satyam fiasco, i.e. between the dates 8th Jan 09 and 31st Jan 09. Table 1
shows the composition of all cessations that occurred in Jan 09 by the type of director as well as the reason for
the cessation. Following Weisbach (1988), Shivdasani and Yermack (1999), and Nielsen and Nguyen (2009) we
classify directors as inside, gray, or independent. All non-executive directors who do not satisfy the
requirements of being an ID are classified as gray while all directors holding executive positions in the company
are classified as insiders.
**** Insert Table 1 here ****
There were a total of 231 director cessations in the month of Jan 09 of which 197 were due to resignations.
Of these 197 director resignations, those by independent, insider and gray directors were 109, 40 and 32
respectively. From the 109 ID resignations in Jan 09, we exclude those resignations that occurred on or before
Jan 7th 09 the day the news of the Satyam fraud hit the markets. We also exclude those firms for which we do
not have at least 100 observations in the year 2008. Since our empirical strategy is based on the event study
approach, we impose this threshold to estimate the market model accurately.
Using the corporate announcements that are reported in the websites of the stock exchanges, for each of the
remaining observations, we cross-checked the date on which the firm announces the resignation by the ID. We
find that the date of announcement of the ID resignation lags the date recorded in the BSE-filing by 0.6 days on
average. In many instances, the firm announces the resignation a day after the one that the director puts down in
her resignation letter to the board this is the date that gets recorded in the BSE-filing. However, in a couple of
instances there is a substantial lag between the date recorded in the BSE-filing and the date on which the firm
announces the resignation. We exclude these observations from our sample. We also ensure (by checking the
stock exchange websites that lists company-specific news items) that there are no other corporate
announcements from day -1 to +2 around the ID resignations. After these exclusions, we are left with 94
resignations, which constitute our sample.
In our sample, 89 different individuals IDs held the ID position in 82 different BSE-listed firms. Panel A of
Table 2 shows the number of IDs that resigned from a firm. We notice that single ID resignations form the
majority there are 74 such firms in the sample. However, there were five instances when two directors
resigned from the firm; the number of instances of three and four directors resigning following the Satyam
fiasco equaled two and one respectively. Of the 89 individual directors in this sample, 87 of them resigned from
only one firm; one director resigned from two firms and another from five firms.
Panel B of Table 2 shows the distribution of the total number of directorships held by these 89 individuals.
Notice that only 69% of the IDs resigned from the one and only firm they were associated with. A significant
minority (31%) held multiple ID positions and selectively chose to resign from some firms.
12
The data on firm characteristics and market performance comes from the Prowess database maintained by
CMIE. This database is the preferred database for research related to Indian financial markets and Indian
companies. To examine our hypothesis relating the role played by the IDs in crucial board committees (for
example, the audit and finance committees), for each of our 94 observations, we search the Prowess database for
the board committees on which the director is involved. In those instances in which such information is missing
in the Prowess database, we check the companys annual reports as well as the company website to extract such
information.
4.2 Descriptive statistics

Since we focus on the sample of firms that experienced an ID resignation in Jan 09, readers may believe
that our results are restricted only to the firms in this sample. To determine whether the firms and IDs in our
sample are representative of the listed firms in India (which is the appropriate comparison for the relevant
population), we provide a comparison between our sample and the universe of listed firms in the Bombay Stock
Exchange. Table 3 gives descriptive statistics for our sample of directors who resigned from their board
positions and compares them with the corresponding figures for IDs in all BSE-listed firms. Panel A compares
the number of IDs in the boards while Panel B provides a comparison of the age distribution of the IDs and
Panel C compares the distribution of the tenure of the IDs (equal to the number of years they have served on the
board). For each of these parameters, the sample distribution closely mirrors the parameters distribution in the
population.
In Table 4, we display the summary statistics for all our explanatory variables in our sample as well as for
the population of BSE listed firms for which information on the variable is available in the Prowess database.16
Table 5 shows the description and the source for all the variables. We find that for most of these variables as
well, the sample distribution stays close to the parameters distribution in the population. Putting together the
sample and population characteristics in Tables 3 and 4, we infer that our sample is not systematically selected
based on any observable firm, board or director characteristics.
**** Insert Tables 4 and 5 here ****
5. Empirical Results
We undertake our empirical analysis in three parts. First, we investigate Hypothesis 1 by examining the
stock price reaction to ID resignations motivated by the Satyam fiasco. In the second part of the analysis, we
examine other possible determinants of the stock price reactions to these ID exits to infer whether or not the
16
Since in many cases we manually computed the variables corresponding to whether the director sat on the Audit
Committee, the Directors Business Expertise as measured by her professional degrees and whether the director sat on the
Finance Committee variables for our sample of firms by looking for this information from the companys website, we have
not computed these variables for the BSE population.
13
stock price reactions capture the value that the firm-specific information possessed by IDs adds to the
monitoring and advisory roles of IDs. Finally, we investigate hypotheses 2 4 to examine further the role of
firm-specific information possessed by IDs.
5.1 Stock price reactions

To test Hypothesis 1 relating the stock price reaction to ID resignations, we compute abnormal returns using
the market model:
~
ri = i + i ~
rm + i
(7)
where ~
ri and ~
rm denote the daily stock returns on stock i and the market respectively while i and i are firms
alpha and beta respectively with respect to the market return. We use the broad-based BSE Sensex as the proxy
for the benchmark market return. We estimate the market model using the daily stock return data for the year
2008 and use the parameter estimates for i and i to estimate the abnormal returns for Jan 09. The abnormal
return for day t for firm i is given by
ARit = ~
rit i + i ~
rmt
(8)
The cumulative abnormal return over the event window (-1,+2), where date 0 denotes event date, equals:
CARi ( 1,2) =
AR
k = 1
(9)
kt
where k denotes the event day, k [-1,2]. The event date corresponds to the date which the company records as
the date of resignation in its filings with the Bombay Stock Exchange (BSE).
5.1.1
Univariate tests
Panel A in Table 6 presents the time series of abnormal returns for the eleven trading days surrounding the
date of the ID resignation. Columns (1) and (2) report the event day and the number of observations
respectively. In columns (3) and (4), we report the mean stock price reaction as well as the t-statistic for the
mean being statistically different from zero, where the t-statistics are computed using robust standard errors that
account for clustering in the errors by firm. This is necessary since we have a few instances of multiple exits
from the same firm. Columns (5) and (6) list the number of positive and negative stock price reactions. Column
(7) reports the median stock price reaction while column (8) reports the z-statistic corresponding to the sign rank
test for the stock price reaction being different from zero.
Panel A indicates that, on average, a negative share price adjustment is associated with an ID resignation
following the Satyam fiasco. In particular, the stock price reaction on the days surrounding the resignation is
statistically indistinguishable from zero for six straight days from day -5 to 0. In contrast, the stock price
reaction on day +1 is negative and statistically significant at the 10% level. Using a sign-rank test, we find a
statistically significant negative effect at the 10% level for the stock price reaction on day +1. Furthermore, on
14
days 0 and +1, the majority of the stock price reactions are negative. Since in many instances, the firm
announces the resignation the day after the one recorded in the BSE-filing (with the average delay being 0.6
days), this pattern is consistent with the effect of the ID resignations being fully incorporated into market prices
only when the event becomes publicly known to the market.
In Panel B we report event study results for valuation effects of ID resignations. Cumulated average
abnormal returns are calculated for the two-, three-, and four-day event windows from day -1 to 0, -1 to +1, and
-1 to +2, respectively (day 0 is the date of resignation). We choose these windows to account for (i) any possible
anticipation in the subsequent director resignations following the first resignation after the Satyam fiasco; and
(ii) the lag between the resignation date recorded in the BSE filings and the date on which the market
participants come to know about the resignation. The columns here are identical to those in Panel A. Panel B
shows that for IDs the cumulated abnormal returns (CAR) for the three-day (-1, +1) and four-day (-1, +2)
windows are -1.39% and -1.37% and both these numbers are significantly different from zero. The CAR over
the two-day window (-1, 0) is considerably lower -0.78% and is not statistically significant. This is again
consistent with the fact that the effect of the ID resignation is fully incorporated into stock prices only when the
market participants come to know about the resignation. Using a sign-rank test, we find a significantly negative
effect at the 5% or 1% levels for each of the three event windows.
Panel B also shows considerable variation in the stock price reaction to the director resignations. Although
the majority of the CARs are negative for each of the three event windows, CARs are not always negative. In
particular, 32 out of the 94 ID resignations (34%) are associated with positive stock price reactions over the
four-day event window (-1,+2). This cross-sectional variation enables us to study the potential determinants of
the stock price reaction to the ID resignations.
Overall, the results in Table 6 show that stock prices drop significantly following the ID resignations that
followed the Satyam fiasco. This result is consistent with our main hypothesis (Hypothesis 1) that the firms in
which IDs resigned in Jan 09 experience negative abnormal stock returns following the director resignation.
5.1.2
Multivariate tests
Having confirmed that the stock price reaction following the ID exits in Jan 09 was negative, we now
examine whether: (i) this effect is robust to controlling for other potential determinants of such a negative stock
price reaction; and (ii) more importantly, whether we can attribute this negative stock price reaction to the the
value that the firm-specific information possessed by IDs adds to the monitoring and advisory roles of IDs. With
respect to the alternative interpretations of this negative stock price reaction, first, the above estimate may be
due to the loss in the value-added by an ID through her traditional roles as a monitor and an advisor, i.e. without
the complementary role of firm-specific information in enabling these roles. Second, the negative stock price
reaction may be an outcome of a panic reaction to the ID exits rather than a rational response to the signal
conveyed by the ID exit. Third, unobserved firm-specific or director-specific factors may influence the stock
price reactions.
15
First, we examine the robustness of the stock price reactions by regressing CAR(-1,+2) on other potential
determinants. Table 7 reports these results. In each of our regressions, we report t-statistics based on standard
errors that are clustered by firm. In these regressions, the coefficient of interest is that of the intercept, which
captures the average stock price reaction to the director resignations. In column (1), we test without including
any control variables. In column (2), we employ industry fixed-effects to address the possibility that industry
factors (such as the technology sector undergoing a reputation loss in the wake of the Satyam fiasco) are driving
our results. Apart from the industry fixed effect, we also include firm-level controls for market capitalization (as
a proxy for size), valuation as reflected in the book-to-market ratio, trading volume, stock performance in the
immediate past (returns in December 2008) as well as the interaction effect between the last two to capture the
effect of any buying or selling pressure in the month before the resignations. We maintain this set of firm-level
control variables in all our regressions in this table. In column (3), we replace the industry fixed effect with the
industrys value weighted return on the date of the directors resignation and find it to be positively correlated.
Next, we include board and director characteristics in columns (3) to (6). Among the board related variables, we
consider board size and board independence as measured by the proportion of IDs on the board to allow for the
possibility that either reduced board size or reduced board independence account for our results. Carter and
Lorsch (2003) argue that board independence is driven by tenure of directors on the board. Since boards with
older directors may have greater tenure on average, we control for the median age and tenure of all directors on
the board as well as those of the IDs on the board. We also control for the resigning IDs tenure on the board as
well as her age. Except for board size, which is significant and positively correlated with the CAR, all the other
controls turn out to be insignificant. Crucially, however, we find the intercept to be negative and statistically
significant across columns (1) to (6), which confirms that the stock price reaction to the ID exits were motivated
by the Satyam fiasco was negative and economically large.
5.1.3
Accounting for the effect of traditional value added by IDs
Despite the stock price reaction being robust to the inclusion of several firm-level and director-specific
controls, we cannot infer yet that the stock price reaction measures the value of the firm-specific information
possessed by the resigning IDs. This is because the stock price reaction could also be due to the loss in valueadded by an ID through her traditional roles as a monitor and an advisor, i.e. without the complementary role of
firm-specific information in enabling these roles.
To account for this possibility, we expand our sample by searching and including all ID resignations that
occurred from Jan 1st, 2006 to Dec 31st, 2009 for each of the 82 firms in our sample. Since the Prime Database
begins its coverage of directors from 2006, we start this sample in the same year. Of these 82 firms, 43 firms had
another ID resignation either during the period Jan 1st, 2006 to Dec 31st 2008 or during the period Feb 1st, 2009
to Dec 31st, 2009. While firms in this sample had two other ID resignations on average during either one of these
16
periods, two firms had six more resignations during either one of these periods. The regression we implement is
given by:
CARijt = i + 1 Jan09 t + ijt
(10)
where the dummy Jan09t equals 1 for the ID resignations in the time period Jan 8th to Jan 31st 2009 and 0 for the
other ID resignations. We include firm-fixed effects (i) to allow for possible firm- and board-specific factors
that may confound an estimate of the stock price reaction to the ID resignations. Given the firm-fixed effects,
the coefficient 1 captures the average within-firm difference in stock price reactions due to the ID resignations
in Jan 09 vis--vis those in the period preceding and following Jan 09:
1 =
1
N
(CAR
N
i =1
i , Jan 09t =1 CARi , Jan 09t = 0
(11)
As Bar-Hava and Segal (2010) show, complete information relating to ID exits does not get revealed when the
exits occurred during normal times. As a result, stock market reaction to the ID exits in the period preceding and
following Jan 09 does not capture the value the firm-specific information adds to the monitoring and advisory
those of IDs. Yet, the traditional value added through the monitoring and advisory roles, i.e. without the
complementary value added by the firm-specific information possessed by the ID, would be captured in the
stock price resignations in the period preceding and following Jan 09. Therefore, comparing the stock price
reaction to ID resignations were motivated by the Satyam fiasco to those in normal times captures purely the
value that the firm-specific information possessed by IDs adds by enhancing the effectiveness of the monitoring
and advisory roles. Furthermore, any panic (market) reaction caused by the ID resignations on average would
get netted out in this specification too.
Table 8 shows the results of these tests. Columns (1)-(4) in Table 8 report the results from regression (10).
Here, we find the coefficient 1 to be negative and statistically significant. Thus, after controlling for unobserved
firm-specific factors, we find the stock price reaction to ID resignations in Jan 09 is negative and statistically
significant.
While the regressions in columns (1) to (4) control for any average panic (market) reaction to the exits of
IDs, it is possible that the panic due to such exits was particularly acute in Jan 09 when compared to exits for
the same firm in the period before or after the Satyam fiasco. To account for this possibility, we calculate the
difference in Satyam-motivated and non-Satyam-motivated CARs for resignations by non-independent
directors. Since insider and gray directors are likely to possess greater firm-specific information than IDs, the
panic reaction to exits by non-independent directors in Jan 09 should be at least as much as that for ID exits
during this period. By netting out this difference between Satyam-motivated and non-Satyam-motivated exits for
non-independent directors , we net out the effect of a disproportionate panic reaction to ID exits in Jan 09. We
implement this test using the following regression:
17
CARijt = i + 1 ( Jan09 t ) * (Independen t ijt ) + 2 Jan09 t + 3 Independen t ijt + ijt
(12)
1 = (CAR indep , Jan 09 =1 CAR indep , Jan 09 = 0 ) (CAR not indep , Jan 09 =1 CAR not indep , Jan 09 = 0 )
(13)
where
t
nets out any acute panic (market) reaction to ID exits in Jan 09. Column (5) of Table 8 shows that the
coefficient 1 is negative and statistically significant.
5.1.4
Stock price reaction in firms from which IDs chose not to resign
Next, we investigate hypothesis 2, which predicts that the stock price reaction in firms from which IDs
chose not to resign would be positive. To undertake this test, however, we cannot use the full sample of firms
from which IDs did not resign because there is no material event on a particular date to examine the stock price
reaction to the same. Therefore, we use the sample of exiting IDs that sat on multiple boards and chose to resign
from a subset of the same. Thus, we focus on the sample of 28 individual directors that held multiple ID
positions and extend this sample to also include the firms from which the ID did not resign. Thus, the sample
includes those IDs who resigned between Jan 8th and Jan 31st 2009 from one or more of the firms in which they
were involved but continued to be IDs in one or more other firms. For each ID, we match the other firms in
which he is an ID and calculate the CAR surrounding his date of resignation from the firm that he resigned.
Employing this sample achieves two objectives. First, we are able to examine the stock price reaction to a
resignation using director fixed effects to control for unobserved director characteristics that may influence the
stock price reactions. Second, by examining the stock price reaction in the firm(s) in which the ID chose to
continue on the same date when she resigned from other firm(s), we are able to examine the effect of the signal
conveyed by the ID choosing to continue in the position.
Table 9 shows the result of these tests where we control for the effect of unobserved director characteristics
through director-fixed effects. After controlling for director-fixed effects, the firm(s) from which the director
quit has a significantly negative effect in each of the specifications while the firm(s) in which the ID chose to
continue experienced a positive and statistically significant stock price reaction. This result does reaffirms
hypothesis 1 after controlling for unobserved director characteristics and provide supporting evidence for
hypothesis 2.
5.1.5
Effect of audit committee presence and business expertise
We now investigate hypotheses 3 and 4 in Table 10, where we examine differences in stock price reactions
due to IDs undertaking different crucial functions of the board. In column (1), we regress CAR on a dummy for
the ID being on the boards audit committee and find it to be negative and statistically significant. In column (2),
we regress CAR on a dummy for the ID having business/ accounting expertise and find the effect of the same to
be negative and significant as well. Then, to examine if directors possessing both features account for both the
18
above results, we add the interaction of both these dummies together with the dummies themselves and find that
the entire effect of both the individual variables is soaked up by the interaction variable. This suggests that an ID
may be better positioned to fulfill her monitoring role if she serves on the powerful audit committee of the board
and if she is equipped with a business/ accounting related degree to aid her in this monitoring role. In column
(3), we include the dummy for the ID being on the boards finance committee and do not find it to matter. Thus,
the results in columns (1) - (3) of Table 10 are consistent with Hypotheses 3 and 4.
5.1.6
Effect of information acquisition costs as proxied by analyst coverage
Duchin, Matsusaka, and Ozbas (2010) use analyst coverage as a proxy for the costs incurred by outsiders in
acquiring information about a firm and find that adding IDs adds value for firms with low information costs, but
diminishes value for firms where information costs are high. Therefore, to examine whether the stock market
reaction to the ID exits motivated by the Satyam fiasco are correlated with the Duchin et. al. measure of
information costs, in column (6) of Table 10 , we include a dummy for availability of analyst coverage for a
firm. We find its coefficient to be statistically indistinguishable from zero, which suggests that the market
assessed value of the firm-specific information possessed by an ID does not vary with analyst coverage.
Since IDs have much greater access to information than analysts, IDs are not outsiders to the firm in the way
that analysts are. Therefore, a firm for which analysts have difficulties in acquiring information may yet be one
where IDs can acquire the necessary firm-specific information with relative ease. The fact that analyst coverage
is not correlated with the market-assessed value of information possessed by IDs is consistent with this
argument.
5.1.7
Effect of stock ownership patterns
The ownership pattern of the firm in question is likely to play a role in the effectiveness of its corporate
governance. Family owned business groups constitute an important category in India with related corporate
governance issues. Therefore, we investigate Hypothesis 4 relating to the effect of an ID in a family-owned firm
when compared to other professionally owned and managed firms. We also examine whether the share of
promoters in the equity of a firm or the share of institutional ownership in the firm matter for the value added by
an ID. Promoters share comes first in this list because prior research has indicated that high level of promoter
ownership can act as a bonding device with outside shareholders to signal the commitment of owners to
maximize shareholder value. Since prior research has also highlighted the role of institutional owners as
monitors in the firm, we decompose the total institutional ownership in a firm into three different categories: the
shares owned by Foreign Institutional Investors (FIIs), Mutual Funds and Banks and Financial Institutions.
Table 11 reports the results of these ownership variables. Columns (1) and (2) includes the dummy for familyowned firm and the promoters share respectively while in Column (3) we include them both to account for the
fact that promoters share may be high in the family-owned firms. Interestingly, in columns (1) and (3), family19
owned enterprises report a consistently and highly significant positive effect on the CARs. This suggests that
relatively speaking the ID adds little value there, which is consistent with our Hypothesis 4. While this may not
be a vote of no-confidence against the institution of IDs, it may well be interpreted as the markets limited faith
in the de facto independence (and therefore value) of these board members in a family-owned firm.
Columns (3) - (5) include the shares owned three different categories of institutional investors while column
(6) includes all three together. Neither of three variables seem to matter individually or as a group. In column
(8), we run a horse race between all the above ownership variables and find that the dampened effect of IDs in
family-owned enterprises stays quite robust. When the presence of family-owned firms is accounted for, we find
the institutional ownership variables to matter. In particular, the exit of an ID from a firm with higher FII share
has a significant negative impact when we control for the presence of family-owned firms.
6. Conclusion
Using a natural experiment, we assess the economic value of firm-specific information possessed by an ID.
By developing a very simple theoretical model, we argue that the firm-specific information that the ID possesses
provides teeth to the monitoring and advisory roles of an ID. Our argument is in spirit similar to the one
provided by Aghion and Tirole (1997) when distinguishing formal authority from real authority real power
over decisions stems from context-specific information. The natural experiment we exploit is provided by the
recent Satyam fiasco in India. Following the disclosure of extensive accounting fraud by the promoter family in
Satyam, IDs resigned from other Indian firms en masse. Since these resignations were motivated by an
unexpected shock external to the firm, they were unaffected by firm- and director-specific factors coinciding
with the time of the resignation. Using the extraordinarily large number of such resignations in Jan 09, we find
the four-day cumulative abnormal return surrounding these resignations to be -1.37%. This effect is robust even
after controlling for: (i) the effect of traditional value added by IDs through their monitoring and advisory
roles, i.e. without the complementary support provided by the firm-specific information possessed by the ID; (ii)
any panic reactions to ID exits; (iii) observed and unobserved firm and director characteristics; and (iv) industry
fixed-effects and the industry return in Jan 09 to address the possibility that the negative abnormal returns were
driven by the technology sector undergoing a reputation loss in the wake of the Satyam fiasco. . On the flip side,
IDs continuing on their positions in some firms is interpreted by the market as a signal of positive firm specific
information possessed by the ID, which is reflected in the significantly positive stock price reaction to the same.
Consistent with the fact that IDs sitting on the audit committee of the board will have more reliable/valuable
firm-specific information, we find a disproportionate effect to the resignations by such directors. Among these
cases, those directors that possess business expertise as well account for the bulk of the disproportionate effect.
All these findings are consistent with the de facto independence of an ID being greater in settings where the ID
has more reliable/ valuable firm-specific information.
20
Our study highlights that apart from the underlying relationships that may compromise conscious ID
neutrality, an IDs de facto independence stems from the firm-specific expertise/information acquired over time
by the ID. Thus, our study suggests that regulation that requires IDs to invest in acquiring firm-specific
information and requires the necessary cooperation from management in providing this information could be
instrumental in enhancing the de facto independence of IDs and thereby considerably strengthen the institution
of IDs as a monitoring mechanism. Our study opens up possibilities for future studies assessing the difference in
de facto and de jure roles of IDs in varying legal and economic contexts such as emerging markets versus
developed countries, countries that differ in the strength of legal protection accorded to shareholders, etc. and
explaining the determinants of variations therein. Such studies may prove instrumental in designing policies to
strengthen the institution of IDs as well as corporate governance around the world.
Appendix Proof of Lemma

ID exits from firm i if and only if . Substituting for and and
simplifying, it follows that ID exits from firm i if and only if:

Since it follows that f ) which proves the result.
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23
Figure 1: Exodus of independent directors from Indian listed firms Jul '07 to Jul '10
Figure 2: Timing and Qequence of Events
24
Table 1: Cause of director cessations in Jan 09

This table reports the composition of the sample of director cessations from companies listed at the Bombay
Stock Exchange (BSE) between the dates of January 1, 2009 and January 31, 2009. The list of director
cessations is drawn from the mandatory filings by BSE listed companies as compiled in the Prime Database. The
explanations for the cited reasons for the director cessation are as follows: Nomination Ended means that the
bank/ institutional investor that appointed the director ended the nomination period for that director. Superceded implies that the director was replaced. IDs are those outside directors that satisfy the requirements
specified by the Securities and Exchange Board of India (SEBI). See Appendix for the details about this
definition. Gray directors are those that are not company executives, i.e. outsiders, but do not satisfy the
requirements for independent directors. Insider directors are company executives.
Reason for Cessation
Gray
Director Type
Independent
Insider
Not known
All
Nomination Ended
Retired
Resigned
Super-ceded
Term Expired
Not Available
1
1
32
4
2
3
8
0
109
1
2
5
2
0
40
2
0
1
0
1
16
0
1
0
11
2
197
7
5
9
Total
43
125
45
18
231
Table 2: Number of ID resignations per firm and the number of directorships held by IDs that
resigned in Jan 09
Panel A: Number of IDs resigning from a firm
Total number of IDs that resigned
from the firm
No. of firms
74
1
5
2
2
3
0
4
1
5
Total
82
%
90
6
3
0
1
100
Panel B: Number of directorships held by the resigning directors

Total number of directorships held by
No. of
the resigning ID
individuals
%
61
1
69
19
2-3
21
6
4-5
7
2
6-10
2
1
> 10
1
Total
89
25
100
Table 3: Characteristics of IDs in the BSE population and our sample

This table reports the characteristics of IDs for the population comprising all the firms listed at the Bombay
Stock Exchange (BSE) and our sample which includes only the firms from which ID resigned between the dates
of January 1, 2009 and January 31, 2009. The list of director cessations is drawn from the mandatory filings by
BSE listed companies as compiled in the Prime Database. This sample includes only those cessations where the
reason is specified as Resignation. The date is that specified in the companys filing with the BSE and
therefore reported in the Prime Database. IDs are those outside directors that satisfy the requirements specified
by the Securities and Exchange Board of India (SEBI). See Appendix for the details about this definition. Panel
A, B and C report the distribution of the number of IDs, their age and the length of their tenure (in years) on the
firms board respectively.
Panel A: Distribution of number of IDs
All BSE
Our Sample
No. of IDs
No. of Cos.
%
No. of Cos.
%
13
<3
535
22
14
65
3 5
1,506
63
69
16
6 10
334
14
17
0
> 10
3
0
0
Total
2,378
100
Panel B: Age distribution of IDs

All BSE
Age
No. of IDs
<25
8
26 35
244
36 45
841
46 60
2,464
61 69
1,748
70 80
1,299
81 90
225
> 90
7
Not Known
7
%
0
4
12
36
26
19
3
0
0
Total
100
6,843
94
Our Sample
No. of IDs
%
0
0
3
4
16
18
34
37
24
26
15
16
2
3
0
0
0
0
94
Panel C: Distribution of tenure of IDs

All BSE
Age
No. of IDs
< 1 Year
582
1-3 Years
1,589
3-6 Years
2,778
6-9 Years
1,648
9-12 Years
576
>12 Years
1,647
Not Known
18
%
7
18
31
19
7
19
0
Total
100
6,843
26
100
100
Our Sample
No. of IDs
%
8
9
25
27
27
29
16
18
5
6
13
14
0
0
94
100
Table 4: Summary statistics for our sample and for all BSE-listed firms
In this table, we give summary statistics for the variables used in our tests. We present the summary statistics for
our sample as well as for the BSE firms for which information on the variable is available in the Prowess
database. Since we manually computed the variables corresponding to whether the director sat on the Audit
Committee or the Finance Committees of the Board and the Directors Business Expertise (as measured by his
professional degrees), we have not computed these variables for the BSE population. The definition of these
variables is described in Table 5.
Board and Director variables:

Board Size
No. of IDs
No. of promoter directors
Median board age
Median ID age
Median tenure of IDs on board
Median tenure on board
Director's Remuneration
Directors age
Directors tenure
Audit committee
Finance committee
Directors business expertise
Ownership variables:
Promoters share
Institutional ownership
FII ownership
Bank/ Financial institution
ownership
Family owned
Firm characteristics:
Book to market
Market Capitalization
Stock return in Dec '08
Trading volume (in millions)
Our Sample
Std.
N Mean
devn.
Max
94
94
94
94
94
94
94
94
94
94
94
94
94
8.2
4.1
1.9
58.1
59.8
8.2
9
1.1
58.9
6.1
45%
35%
63%
3.1
1.9
2.2
11.3
13.3
6.4
5.6
2.5
12.5
6.1
50%
48%
97%
18
10
7
80
80
39
24
18.4
85
33.9
1
1
3
2117
2117
2117
2117
2068
2068
2117
2055
7.2
3.8
1.5
56.3
59.3
7.2
9
0. 6
2.7
1.8
1.4
8.2
10.2
5
5.4
2.7
20
12
9
81
84
39
35
6.8
94
94
94
47%
14%
7%
20%
12%
8%
89% 2095
49% 2095
33% 2095
50%
9%
4%
19%
12%
8%
99%
88%
71%
94
94
5%
49%
5%
50%
19% 2095
100%
2%
5%
43%
94
94
94
94
2
476.8
10%
0.06
2
10 1847
1748 13750.1 2100
17%
56% 1700
0.24
2.2 2100
1.8
700
13%
0.1
10.6
8000
19%
1.2
384.5
19100
121%
37.3
27
All BSE listed firms

Std.
N Mean devn.
Max
Table 5: Variable definitions

This list includes all variables used as regressors or for summary statistics. All these variables are either drawn
from the Prime database or from the Prowess database of CMIE.
Variable name
Audit committee
ownership
Board Size
Book to market
Directors age
Directors tenure
Director's Remuneration
Family owned
FII ownership
Finance committee
Industry Return
Large
Median age of Audit Committee
Median board age
Median ID age
Median tenure of IDs on board
No. of IDs
No. of promoter directors
Promoters share
Small
Tobin's Q
Trading volume
Description
Dummy=1 if director is on the Board's Audit Committee; else 0
Source
Prowess
Bank/ Financial institution share in firm's equity

Size of the board
The ratio of book value of common equity to market value of
common equity. Book value of common equity is the sum of book
common equity and deferred taxes.
Age of the particular director
Dummy=1 if director has an MBA or CA/CFA degree; else 0
Tenure of the particular director on the firm's board
Directors remuneration
Family owned
Foreign Institutional Investors(FIIs) share in firm's equity
Dummy=1 if director is on the Board's Finance Committee; else 0
Value weighted average of the industry return on the day of the
directors resignation
Share of Institutions in firm's equity
Dummy for large firms (market capitalization greater than median)
Market Capitalization (in millions)
Prowess
Prowess
Prowess
Median age of firm's Board Audit Committee members

Median age of the firm's directors in Dec '08
Median age of firm's IDs
Median tenure of firm's IDs
Median tenure of firm's board members in Dec '08
No of IDs on the board
No of Promoter Directors on the board
Promoters share in firm's equity
Dummy for small firms (market capitalization less than median)
The market value of assets divided by the book value of assets;
market value of assets is computed as book value of assets plus the
market value of common stock less the sum of the book value of
common stock and balance sheet deferred taxes. These values are
calculated for each quarter using quarter-end values
Trading volume (in 100 millions)
28
Prime
Prowess
Prime
Prowess
Prowess
Prowess
Prowess
Prowess
Prowess
Prowess
Prowess
Prowess
Prowess
Prowess
Prowess
Prowess
Prowess
Prowess
Prowess
Prowess
Prowess
Prowess
Prowess
Table 6: Stock price reaction to ID resignations following the Satyam fiasco

This Table shows the stock price reaction to the resignation of IDs following the Satyam fiasco. The list of
director resignations is drawn from BSE filings as compiled in the Prime Database. The sample includes ID
resignations between Jan 8th and Jan 31st, 2009. Panel A reports the daily abnormal returns, relative to the
market model, for each trading day from five days before the reported date of resignation to five days after.
Panel B reports the Cumulative abnormal returns over different windows surrounding the reported date of
resignation. The event date corresponds to the date which the company records as the date of resignation in its
filings with the Bombay Stock Exchange (BSE). Since we focus on the director resignations in Jan 09, we
estimate the market model using daily stock returns for the trading days in 2008. Columns 1 and 2 report the
event day and the number of observations respectively. In Columns 3 and 4, we report the mean stock price
reaction as well as the t-statistic for the mean being statistically different from zero, where the t-statistics are
computed using robust standard errors that account for clustering in the errors by firm. Columns 5 and 6 list the
number of positive and negative stock price reactions. Column 7 reports the median stock price reaction while
Column 8 reports the z-statistic corresponding to the sign rank test for the stock price reaction being different
from zero. ***, ** and * denote statistical significance at 1%, 5% and 10% respectively.
Event Day
Obns.
Mean
-5
-4
-3
-2
-1
0
1
2
3
4
5
94
94
94
94
94
94
94
94
94
94
94
0.02%
-0.27%
-0.23%
-0.41%
-0.57%
-0.21%
-0.61%
0.03%
-0.10%
0.40%
0.51%
t-statistic Positive Negative Median

Panel A: Daily abnormal returns
0.07
-0.81
-0.58
-1.03
-1.50
-0.50
-1.82*
0.07
-0.27
1.30
1.85*
51
50
38
45
47
35
40
43
48
52
57
43
44
56
49
47
59
54
51
46
42
37
Sign rank test
0.24%
0.31%
-0.96%
-0.87%
-0.02%
-0.87%
-0.53%
-0.32%
0.17%
0.45%
0.45%
0.01
-0.80
-0.72
-1.41
-1.35
-1.23
-1.79*
-0.70
-0.40
1.37
1.85*
-0.80%
-1.98%
-1.87%
-2.18**
-2.89***
-2.61***
Panel B: Cumulative abnormal returns

(-1,0)
(-1,+1)
(-1,+2)
94
94
94
-0.78%
-1.39%
-1.37%
-1.35
-2.04**
-1.83*
36
32
32
29
58
62
62
Table 7: Multivariate analysis of stock price reaction to ID resignations after Satyam fiasco
This table reports results from the regression of the cumulative abnormal return over days -1 to +2, where
day 0 corresponds to the date of ID resignation. The list of director resignations is drawn from BSE
filings as compiled in the Prime Database. The sample includes ID resignations between Jan 8th and Jan
31st, 2009. The variable Dummy for Jan 09 equals 1 for the time period Jan 8th and Jan 31st, 2009 and 0
otherwise. The other independent variables are as defined in Table 5. The robust standard errors account
for clustering in the errors by firm. ***, ** and * denote statistical significance at 1%, 5% and 10%
respectively.
Dependent variable:
Constant
(1)
-1.37*
(-1.83)
Industry Return
Board Size
No. of IDs
No. of Promoter
directors
Cumulative abnormal return (-1,+2) in %

(2)
(3)
(4)
(5)
-3.32*
-2.77**
-4.86*
-6.20*
(-1.79)
(-2.62)
(-1.78)
(-1.89)
99.09***
(2.96)
0.72*
(1.67)
-0.67
(-1.09)
-0.55
(6)
-6.44**
(-2.31)
(-1.65)
0.09
(0.57)
0.10
(0.94)
-0.08
(-0.56)
-0.04
(-0.46)
Median board age

Median tenure of IDs on
board
Median ID age
Directors tenure
Directors age
Trading volume
Book to market
Stock return in Dec08
Trading volume * Stock
Return in Dec08
Industry Fixed Effects
Observations
R-squared
No
94
0.00
0.67
(0.72)
-3.67
(-0.41)
0.20
(0.48)
4.33
(0.68)
24.62
(0.45)
Yes
94
0.30
0.71
(1.63)
-0.33
(-0.05)
0.25
(0.72)
5.91
(1.21)
9.71
(0.28)
No
94
0.20
30
0.56
(1.22)
-2.47
(-0.34)
0.36
(1.18)
3.59
(0.72)
20.76
(0.55)
No
94
0.14
0.64
(1.48)
-2.23
(-0.27)
0.29
(0.80)
3.42
(0.68)
13.06
(0.33)
No
94
0.09
-0.18
(-1.22)
0.08
(1.53)
0.58
(1.42)
-1.18
(-0.16)
0.43
(1.35)
4.18
(0.98)
11.80
(0.32)
No
94
0.10
Table 8: Stock price reaction to ID resignations using firm fixed-effects panel regressions
This table reports results from fixed-effects panel regressions of the cumulative abnormal return over days
-1 to +2, where day 0 corresponds to the date of ID resignation. The list of director resignations is drawn
from BSE filings as compiled in the Prime Database. All regressions include firm-fixed effects. Columns
(1) to (4) report results from the following regressions:
CARijt = i + 1 Jan09 t + ijt

where i denotes the firm-fixed effect. The sample for these regressions includes those ID resignations
between Jan 8th and Jan 31st 2009 for which the firm also experienced a resignation by an ID either during
the period Jan 1st, 2006 to Dec 31st 2008 or during the period Feb 1st, 2009 to Oct 31st, 2009. Jan 09
dummy equals 1 if the ID resignation occurred between Jan 8th and Jan 31st, 2009. Column (5) reports
the result from the following regressions:
CARijt = i + 1 ( Jan 09 t ) * (Independen t ijt ) + 2 Jan 09 t + 3 Independen t ijt + ijt
where i denotes the firm-fixed effect. The sample for these regressions includes resignations by all
directors between Jan 8th and Jan 31st 2009 for which the firm also experienced a resignation by any
director (gray, inside, independent) during the period Feb 1st, 2009 to Dec 31st 2010. Jan 09 dummy
equals 1 if the ID resignation occurred between Jan 8th and Jan 31st, 2009. Independent equals 1 if the
director was an independent one. The other independent variables are defined in Table 5. The standard
errors are robust to heteroskedasticity and are clustered by firm. ***, ** and * denote statistical
significance at 1%, 5% and 10% respectively.
Dependent variable:
Jan 09 dummy
Jan 09 dummy * Independent
Independent
Directors tenure
Directors age
Directors financial expertise
Director is a Ph.D.
Constant
Sample
Firm FE
Observations
R-squared
Cumulative Abnormal Return (-1,2) in %

(2)
(3)
(4)
(5)
-6.32**
-6.26**
-6.26**
-5.56***
(-2.35)
(-2.34)
(-2.34)
(-3.12)
-1.78**
(-2.56)
0.80
(1.13)
1.08**
(2.47)
-0.67**
(-2.62)
-1.44
(-0.26)
11.33**
(2.13)
1.62
44.31**
1.62
-9.76***
(0.31)
(2.59)
(0.31)
(-6.69)
ID resignations from Jan 1st 2006 to Dec 31st
All director
2010
resignations
from Jan 1st
2009 to Dec
31st 2010
Yes
Yes
Yes
Yes
Yes
228
228
228
228
655
0.43
0.43
0.43
0.43
0.32
(1)
-6.26**
(-2.34)
31
Table 9: Stock price reaction to ID resignations using director fixed-effects panel

regressions
This table reports results from fixed-effects panel regressions of the cumulative abnormal return over days
-1 to +2, where day 0 corresponds to the date of ID resignation. The list of director resignations is drawn
from BSE filings as compiled in the Prime Database. All regressions include director-fixed effects; the
sample for these regressions includes those IDs who resigned between Jan 8th and Jan 31st 2009 from one
or more of the firms in which they were involved but continued to be involved in one or more other firms.
For each director, we match the other firms that he is involved in and calculate the cumulative abnormal
return surrounding his date of resignation from the firm that he resigned. Dummy for firm from which
the ID quit equals 1 if the corresponds to the firm from which the director resigned and zero otherwise;
Dummy for firm in which the ID continued equals 1- Dummy for firm from which the ID quit. The
other independent variables are defined in Table 5. The standard errors are robust to heteroskedasticity.
***, ** and * denote statistical significance at 1%, 5% and 10% respectively.
Dependent variable:
Cumulative abnormal return (-1,2) in %

(1)
(2)
(3)
(4)
-3.74** -3.81** -2.97*
-3.53*
(-2.46)
(-2.37)
(-1.81) (-1.87)
2.51**
3.86**
2.25** 4.68**
(2.42)
(2.43)
(2.14)
(2.47)
307.04
89.81
(0.86)
(0.28)
-67.49
19.92
(-0.47)
(0.10)
-17.65
-24.51
(-0.33)
(-0.37)
11.40**
18.17**
(1.99)
(2.18)
-879.81
-841.28
(-0.56)
(-0.37)
No
No
Yes
Yes
100
100
100
100
0.05
0.11
0.31
0.40
Dummy for firm(s) from which the ID

quit
Dummy for firm(s) in which the ID
continued
Trading volume
Book to market
Trading volume * Stock Return in Dec08
Director-fixed effects
Observations
R-squared
32
Table 10: Difference in stock price reaction to ID resignations depending upon the IDs
ability to acquire and process firm-specific information
This table reports results from the regression of the cumulative abnormal return over days -1 to +2, where day 0
corresponds to the date of director resignation. The list of director resignations is drawn from BSE filings as
compiled in the Prime Database. The sample includes ID resignations between Jan 8th and Jan 31st, 2009. The
independent variables are as defined in Table 5. The robust standard errors account for clustering in the errors by
firm. ***, ** and * denote statistical significance at 1%, 5% and 10% respectively.
Dependent variable:
Audit committee
Audit committee * Directors business
expertise
Cumulative Abnormal Return (-1,+2) in %

(1)
(2)
(3)
(4)
-3.72**
-1.37
(-2.39)
(-0.65)
-1.49**
1.89
(-2.37)
(0.94)
-5.78*
(5)
(-1.85)
Finance committee
-2.01
(-1.13)
Dummy for Analyst coverage

Trading volume
Book to market
Trading volume * Stock Return in Dec08
Constant
Observations
R-squared
0.65
(1.36)
0.62
(0.08)
0.48
(1.53)
1.70
(0.36)
5.57
(0.14)
-1.26
(-1.13)
94
0.14
33
0.43
(1.11)
-2.77
(-0.40)
0.54*
(1.72)
2.63
(0.52)
25.45
(0.72)
-2.10*
(-1.78)
94
0.11
0.49
(1.20)
-1.10
(-0.16)
0.53*
(1.76)
1.21
(0.27)
19.86
(0.56)
-1.69
(-1.47)
94
0.19
0.50
(1.25)
-2.23
(-0.31)
0.46
(1.40)
2.99
(0.58)
20.44
(0.56)
-2.22*
(-1.77)
94
0.09
-0.38
(0.95)
-0.38
(0.95)
0.53
(1.35)
-0.39
(-0.13)
0.26
(0.78)
4.14
(0.70)
8.32
(0.44)
94
0.12
Table 11: Difference in stock price reaction to ID resignations depending upon firm
ownership patterns
This table reports results from the regression of the cumulative abnormal return over days -1 to +2, where day 0
corresponds to the date of director resignation. The list of director resignations is drawn from BSE filings as
compiled in the Prime Database. The sample includes ID resignations between Jan 8th and Jan 31st, 2009. The
independent variables are as defined in Table 5. The robust standard errors account for clustering in the errors by
firm. ***, ** and * denote statistical significance at 1%, 5% and 10% respectively.
Dependent variable is:
Family owned
(1)
4.87***
(3.17)
Promoters share
(2)
1.25
(0.45)
FII ownership
ownership
Trading volume
Book to market
Trading volume * Stock
Return in Dec08
Constant
Observations
R-squared
0.66*
(1.89)
-3.58
(-0.53)
0.06
(0.21)
2.57
(0.52)
13.30
(0.39)
-4.38***
(-4.19)
94
0.19
0.68
(1.55)
-0.88
(-0.12)
0.37
(1.17)
3.72
(0.73)
9.71
(0.26)
-3.45**
(-2.09)
94
0.07
Cumulative Abnormal Return (-1,+2) in %

(3)
(4)
(5)
(6)
4.90***
(3.18)
1.76
(0.64)
0.12
(0.02)
-2.04
(-0.27)
-3.47
(-0.18)
0.65*
0.68
0.68
0.69
(1.85)
(1.57)
(1.58)
(1.59)
-3.87
-0.69
-0.69
-0.76
(-0.57)
(-0.09) (-0.09) (-0.10)
0.07
0.35
0.37
0.36
(0.25)
(1.09)
(1.12)
(1.14)
2.17
4.00
4.08
3.91
(0.44)
(0.80)
(0.80)
(0.79)
15.15
8.41
8.06
8.32
(0.45)
(0.22)
(0.21)
(0.22)
-5.20*** -2.89** -2.77** -2.72*
(-3.01)
(-2.01) (-2.26) (-1.92)
94
94
94
94
0.19
0.07
0.07
0.07
34
(7)
37.73
(1.45)
-42.33
(-1.53)
-50.20
(-1.22)
0.78*
(1.76)
1.02
(0.13)
0.39
(1.18)
4.97
(0.96)
-1.01
(-0.03)
-3.18**
(-2.05)
94
0.09
(8)
5.78***
(3.36)
2.41
(0.86)
45.61*
(1.70)
-62.80**
(-2.14)
-56.09
(-1.45)
0.74**
(2.21)
-2.29
(-0.35)
0.17
(0.55)
3.51
(0.71)
3.41
(0.10)
-5.77***
(-2.78)
94
0.25
Appendix: Definition of an ID
The expression ID shall mean a non-executive director of the company who:
1. Apart from receiving directors remuneration, does not have any material pecuniary relationships or
transactions with the company, its promoters, its directors, its senior management or its holding company,
its subsidiaries and associates that may affect independence of the director.
2. Is not related to promoters or persons occupying management positions at the board level or at one
level below the board.
3. Has not been an executive of the company in the immediately preceding three financial years.
4. Is not a partner or an executive or was not partner or an executive during the preceding three years, of
any of the following:
the statutory audit firm or the internal audit firm that is associated with the company; and
the legal firm(s) and consulting firm(s) that have a material association with the company.
5. Is not a material supplier, service provider or customer or a lessor or lessee of the company, which may
affect independence of the director.
6. Is not a substantial shareholder of the company i.e. own more than 2 percent of the voting shares.
Explanations are:
Associate shall mean a company which is an associate as defined in Accounting Standard (AS)
23, Accounting for Investments in Associates in Consolidated Financial Statements, issued by the
Institute of Chartered Accountants of India.
Senior management shall mean personnel of the company who are members of its core
management team excluding the board of directors. Normally, this would comprise all members
of management one level below the executive directors, including all functional heads.
Relative shall mean relative as defined in section 2(41) and section 6 read with Schedule
IA of the Companies Act, 1956.
Nominee directors appointed by an institution, which has invested in or lent to the company shall be
deemed to be IDs. (Institution for this purpose means a public financial institution as defined in Section
4A of the Companies Act, 1956 or a corresponding new bank as defined in section 2(d) of the Banking
Companies (Acquisition and Transfer of Undertakings) Act, 1970 or the Banking Companies (Acquisition
and Transfer of Undertakings) Act, 1980 (both Acts).
Source: Securities and Exchange Board of India (SEBI)
35

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THE FIRM-VALLUE OF INFORMAT

This paperr can be do

The Firm-value of Information possessed by Independent Directors:

February 26, 2012

Electronic copy available at: http://ssrn.com/abstract=2024295

The Firm-value of Information possessed by Independent Directors:

February 26, 2012

Electronic copy available at: http://ssrn.com/abstract=2024295

Electronic copy available at: http://ssrn.com/abstract=2024295

2.1 The corporate governance scandal at Satyam

2.2 Institutional differences in outside directors liabilities vis--vis the U.S.

2.3 The unrelated prosecution of an eminent ID

2.4 The setting for a natural experiment

Class-action suits by shareholders are not allowed in India.

3.1 Setup and timing of events

, where captures the IDs ability to acquire and

3.2 Costs and benefits of directorship positions

3.3 Equilibrium effort at acquiring firm-specific information

3.4 The unanticipated shock to costs of ID positions

to acquire and process firm-specific information (Raheja, 2005), we hypothesize that:

4. Data and Sample

4.2 Descriptive statistics

5.1 Stock price reactions

Accounting for the effect of traditional value added by IDs

CARijt = i + 1 Jan09 t + ijt

i , Jan 09t =1 CARi , Jan 09t = 0

CARijt = i + 1 ( Jan09 t ) * (Independen t ijt ) + 2 Jan09 t + 3 Independen t ijt + ijt

Effect of audit committee presence and business expertise

Effect of information acquisition costs as proxied by analyst coverage

Effect of stock ownership patterns

Appendix Proof of Lemma

Figure 2: Timing and Qequence of Events

Table 1: Cause of director cessations in Jan 09

Reason for Cessation

Panel B: Number of directorships held by the resigning directors

Table 3: Characteristics of IDs in the BSE population and our sample

Panel B: Age distribution of IDs

Panel C: Distribution of tenure of IDs

Board and Director variables:

All BSE listed firms

Table 5: Variable definitions

Bank/ Financial institution share in firm's equity

Median age of firm's Board Audit Committee members

Table 6: Stock price reaction to ID resignations following the Satyam fiasco

t-statistic Positive Negative Median

Sign rank test

Panel B: Cumulative abnormal returns

Cumulative abnormal return (-1,+2) in %

Median board age

CARijt = i + 1 Jan09 t + ijt

CARijt = i + 1 ( Jan 09 t ) * (Independen t ijt ) + 2 Jan 09 t + 3 Independen t ijt + ijt

Cumulative Abnormal Return (-1,2) in %

Table 9: Stock price reaction to ID resignations using director fixed-effects panel

Cumulative abnormal return (-1,2) in %

Dummy for firm(s) from which the ID

Cumulative Abnormal Return (-1,+2) in %

Dummy for Analyst coverage

Cumulative Abnormal Return (-1,+2) in %

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