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Too Much of a Good Thing? The Impact of Board Independence on Shareholder Value Creation

Our study attempts to shed new light on the impact of board independence on corporate governance by investigating the relationship between board independence (measured by the ratio of independent directors on the board) and shareholder value creation (measured by Tobin’s q). Highlighting the different roles of independent and non-independent directors in corporate governance, we propose that the relationship is not a linear one as commonly assumed in prior research. Firms with a moderate level of board independence are likely to be more effective in corporate governance and thus create more shareholder value than firms with either a low level or high level of board independence. Using a sample of the S&P 500 firms during 1998 to 2005, we find empirical evidence consistent with our predictions.