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Board response to majority outsider regulation

I compile a balanced panel of 2174 publicly traded firms and track their board structure from 1999 to 2006. I detail how boards responded to new regulation (introduced in 2002 and enacted in 2003) that required boards of firms traded on the NYSE and NASDAQ exchanges to have a strict majority of outside directors. I examine how noncompliant boards moved into compliance and compare their behaviour to compliant firms. Noncompliant firms increased independence, but did not increase board size during the regulatory adjustment period. In addition to offering a detailed look at the data, I create a stylized model of board composition and size and suggest how the responses of noncompliant firms to the exogenous regulatory shock can be used to estimate the curvature of a board ‘production function’.