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Should independent directors have term limits? The role of experience in corporate governance.

We examine the role of independent directors with extended tenure in board-level governance, monitoring decisions, and advising outcomes. These directors exhibit a higher level of commitment as they attend more board meetings and take more committee memberships. Firms with a higher proportion of these directors have lower chief executive officer (CEO) pay, higher CEO turnover-performance sensitivity, and a smaller likelihood of intentionally misreporting earnings. These firms also restrict the expansion of resources under the CEO's control as they are less likely to make acquisitions, while the acquisitions they do make are of higher quality. Efforts to impose term limits on directors may, therefore, be misguided.

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Shareholder advisory firms and regulators increasingly view lengthy experience as a negative attribute for independent directors. Independent directors with extended tenures, subsequently referred to as experienced directors, are seen as ineffective in fulfilling the roles of monitoring management and setting firm strategy. The Financial Reporting Council in the United Kingdom does not consider a director who has been on the board for longer than nine years to be an independent director. (1) The implication is that directors become entrenched and aligned with managers after an extended period and are, therefore, unable to monitor them adequately. In the United States, the National Association of Corporate Directors (NACD), an advisory organization that publishes best practice procedures in boardrooms, recommends tenure limits of 10 to 15 years when evaluation procedures are not in place (NACD, 2005). Director term limits have also been seen as a way to bring fresh thinking and ideas onto the board, avoiding stagnation in strategic decision making (Young, 2011). A survey by Heidrick and Struggles (2007) polling 2000 of the largest US firms found that 22% of the 660 respondents imposed term restrictions on directors, more than doubling the 9% in 2001 when the survey was previously conducted.

Despite concerns that experienced directors exacerbate the manager-shareholder agency problem (Jensen and Meckling, 1976), nearly 60% of the Standard & Poor's 1500 (S&P 1500) firms in our sample from 1998 to 2013 have an independent director who has been on the board for longer than 15 years. According to a recent analysis by Guaranteed Minimum Income (GMI) Ratings for the Wall Street Journal, among Russell 3000 companies, nearly 34% of the total independent directors have had a tenure of 10 years or longer. (2) There are at least three reasons why having experienced directors on the board may actually be optimal for firms. First, given their long tenure, most experienced directors have worked with multiple CEOs, which should help them better assess the ability of the current chief executive officer (CEO). Only 10% of directors with tenure longer than 15 years in our sample were hired during the current CEO's term. In addition, over the course of their term, experienced directors will have built up significant financial stakes in the company, aligning their interests with that of the shareholders. A 1% increase in underlying stock increases wealth by $13,318 for a median director with a tenure greater than 15 years, but only $4,382 for those with a shorter tenure. Moreover, just as a long, successful tenure is seen as increasing a CEO's bargaining power (Hermalin and Weisbach, 1998), longer tenure periods should also buttress the position of the directors, helping them to balance the CEO's influence when it is time to make decisions in the boardroom.

In this paper, we examine whether tenure limits are an optimal solution to the potential agency problems caused by experienced directors using an unbalanced panel data set of S&P 1500 firms from 1998 to 2013. To isolate the contribution of experienced directors, we define an experienced director as one with more than 15 years of experience. We then use the proportion of these experienced directors on the board as the key explanatory variable in regressions where firm outcomes including CEO compensation, CEO turnover-performance sensitivity, earnings restatements, acquisition decisions, and acquisition performance are the dependent variables.

Using an aggregate measure, like the median or average, masks the distribution of tenure among directors. The choice of using a fixed number to define an experienced director is crucial to the analysis as it is hard to glean any insight regarding the heterogeneous effects of experienced directors without a concrete definition of "experienced." The decision to use 15 years as the threshold is supported by our director-level piecewise linear regression analysis, though we obtain quantitatively similar results when we use 12 years as the threshold. Also, as mentioned previously, the tenure limit recommended by NACD (2005) is 10 to 15 years. Therefore, we choose the upper bound of this range to examine whether independent directors with tenures beyond this range are really as problematic as the recommendation implies.

The efficacy of different forms of board structure has been studied extensively in the financial literature. However, despite widespread recommendations and legislation on term limits, there is limited empirical evidence as to how director tenure impacts board decision making. One exception is a study by Vafeas (2003), which uses one year of data from 1994 and splits directors according to their relative tenure within the firm. Another set of related studies (Core, Holthausen, and Larcker, 1999; Landier et al., 2012; Coles, Daniel, and Naveen, 2014;) considers whether directors who were hired after the current CEO began their term are coopted by these CEOs. A longer tenure could be a proxy for the fact that the director was hired before the current CEO. However, the results in this paper are not driven solely by the hiring effect. This is demonstrated by controlling for the proportion of directors hired after the current CEO was appointedr and also by rerunning the analysis in a subsample of firms where the CEO's tenure is greater than that of the senior-most independent director.

The analysis consists of five main parts. First, we use director-level data to examine whether experienced directors' commitments to their roles change as tenure increases. We find that far from shirking their responsibilities, these directors are significantly less likely to miss board meetings. Even though participation in a monitoring committee requires extra effort in terms of time and responsibility, experienced directors are significantly more likely to be members of the major board monitoring committees. This membership could be attributed to experienced directors having deeper knowledge of the firm and its operations relative to newer directors, but it nevertheless signals a continued commitment to their role.

Next, we examine the determinants of a higher proportion of experienced directors on the board. Our results suggest that across firms in the same industry, smaller, older, more stable, and successful firms with older and longer tenured CEOs are more likely to have experienced directors. However, when examining within-firm variations using firm fixed-effects, many of these relationships change. For example, a larger proportion of experienced directors is now positively related with firm size, which is intuitive since firms tend to increase in size over the sample period.

Third, we examine the role of experienced directors in three different firm monitoring outcomes using panel regressions on firm-level data. Concerns regarding endogeneity and selection bias do not easily allow for causal inference from such regressions. To alleviate some of these concerns, we use firm and director fixed-effects along with an extensive set of control variables in our analysis. When examining total CEO pay, our results indicate that an increase of one experienced director on the compensation committee decreases the average pay of the CEO by about 3.2%. CEO turnover is also shown to be more sensitive to stock performance when there is a higher proportion of experienced directors. We also find that the presence of one additional experienced director on the audit committee can reduce the probability of intentional misreporting by approximately 25% relative to those firms where there are no experienced directors on the audit committee.

In addition, we determine whether the presence of experienced directors affects strategic decisions in the firm. We find that firms with a higher proportion of experienced directors make fewer acquisitions, thereby limiting the empire building aspirations of the CEO (Roll, 1986). An examination of whether the quality of acquisitions made is higher, using announcement day abnormal stock returns as a proxy for quality, also indicates that a higher proportion of experienced directors on the board is related to increased abnormal returns.

Finally, we conduct several robustness checks to see whether our results are driven by certain alternative explanations. The concerns we consider include self-selection concerns that directors are only willing to stay at better firms, and that firms are only willing to retain better directors over time. We also consider the possibility that a director's tenure is merely a proxy for their general experience and does not have to be accumulated by staying at the same firm for an extensive period. Overall, our results suggest that none of these concerns can fully explain our findings.

This paper falls into the category of research that examines the impact of heterogeneity among directors on board decision making. Initial studies concerning board structure focused on the number of independent directors on the board. Studies suggest that CEO dismissal is more sensitive to performance in firms with a higher number of independent directors (e.g., Weisbach, 1988; Kaplan and Minton, 2012), but independent boards have not been able to curtail excessive CEO pay. Guthrie, Sokolowsky, and Wan (2012) find that the requirement to have all independent directors on the compensation committee actually increased CEO pay after the passage of the Sarbanes-Oxley Act (SOX). Given the lack of clear evidence regarding the benefits of independent directors, research has focused on their heterogeneity. Studies have examined the effect of directors who are foreign (Masulis, Wang, and Xie, 2012), bankers (Guner, Malmendier, and Tate, 2008), female (Adams and Ferreira, 2009), venture capitalists (Baker and Gompers, 2003), CEOs in other firms (Fahlenbrach, Low, and Stulz, 2010), and politically connected (Goldman, Rocholl, and So, 2009). Following these studies on director heterogeneity, this paper uses extended tenure as a distinguishing attribute among independent directors.

This paper makes four contributions. First, we directly address the question of implementing director term limits, which has been suggested as a way to infuse fresh blood onto a board and avoid complacency. Our results indicate that such a policy would be short-sighted as experienced directors make a positive contribution to strategic and monitoring decisions. In addition, we contribute to the growing literature concerning the effect of heterogeneity among independent directors on CEO pay and turnover within firms. While previous studies have tried to measure the actual independence (relative to the officially declared independence) of board directors, their specific expertise, and their networking benefits, there has been little research on tenure as a distinguishing attribute. Moreover, we contribute to the literature on how board structure affects a firm's acquisition strategy. Undertaking acquisitions expands the resources available to the CEO, potentially exacerbating agency problems. Boards with experienced directors may act as a countervailing force to the CEO and help mitigate such agency problems. In addition, we also find that firms with experienced directors make higher quality acquisitions. Finally, we contribute to the literature that considers the trade-off between monitoring and advising. Previous theoretical and empirical research has shown that directors may not be able to accomplish both roles simultaneously as excessive monitoring can lead to a reduction in the information shared by a firm's management. However, our results indicate that experienced directors, whose incentives are aligned with shareholders and who have a high level of firm expertise, may be an exception to this proposition.

I. Data Analysis

A. Data Description

For detailed information on director attributes, we use the RiskMetrics (formerly IRCC) database, which provides data from 1996 to 2013. Only data after calendar year 1999 are included because there is incomplete information on committee membership and leadership prior to that year. The year variable is adjusted to denote the fiscal year rather the year of the Annual Meeting. This allows for matching between the RiskMetrics data and the accounting data from Compustat. The final sample includes data for fiscal years 1998-2013. The Centre for Research in Security Prices (CRSP) is used for stock returns and Execucomp for information on CEO pay and attributes like age and tenure. We use data from Execucomp (the CEOANN flag) to identify CEOs. In the final sample, firms are only included when they have data listed in each of the RiskMetrics, Compustat, CRSP, and Execucomp databases. There are a total of 19,020 firm-year observations, 159,580 director-year observations, and 139,963 independent director-year observations after dropping observations without complete matching data in all of the databases. An independent director is one who is marked as independent by RiskMetrics.

We make a few adjustments to the data to correct errors in the databases. Director tenure is set to missing if it is greater than 90 or less than zero. In addition, if a director's age is less than 21, it is set to be missing. Approximately 10% of the observations do not include CEO age. Another 10% do not include CEO tenure in Execucomp. We manually set the CEO age and tenure values for these observations if publicly available. We also set director ownership to missing if the shares in the company are dual class. The year the stock of a firm is listed is used as the firm age.

B. Data Summary

Table I contains a summary of the independent director data. Each observation is representative of one director-firm-year. As such, each director could be represented multiple times for different firms and years. The sample is divided into four groups to better understand how the characteristics of directors evolve as tenure increases. The first group has tenure less than or equal to five years (L5), the second group has tenure between 6 and 15 years (B6-15), the third group (LI5) includes all observations in the first two groups, and the fourth group (G15) has tenure greater than 15 years. In addition, we also maintain a subsample of the G15 directors who are not former employees. Since we argue that directors with longer tenure tend to be better at monitoring and advising, one concern is that there is a high proportion of former employees who have better understanding of the firm within the long-tenure directors. In this case, our results are not capturing the effect of having a longer tenure. To eliminate this concern, in all subsequent tests, we do not consider experienced directors who used to be employees of the firm. Finally, in Column (G), we report the differences in means for each variable between directors with tenures lower than or equal to 15 years and directors with tenures greater than 15 years who are not former employees in the firm.

While some attributes in Table I show the expected correlation, like the positive correlation between age and tenure, other attributes offer more interesting insights. Approximately 63% of the directors in the L5 group were hired during the term of the current CEO, which decreases to 27% for directors in the B6-15 group and to only 10% for directors in the G15 group. This statistic weakens the claim that directors with extended tenures are entrenched with the current CEO of the firm. On the contrary, experienced directors have worked with multiple CEOs, giving them the opportunity to improve their monitoring skills. In addition, the evidence in Column (G) suggests that when compared with directors with short tenures, experienced directors are less likely to be female and tend to have fewer directorships. The differences for all characteristics are significant at the 1% level.

To further investigate any differences between directors among different tenure groups, we also report the three most frequently observed primary titles for each group. This information is available in RiskMetrics for years 1998-2001 and 2007-2013. The data suggest that for all independent directors including the experienced directors, the most common title is always "Retired." One difference between short-tenured and long-tenured directors is that while "Executive" and "CEO" are the second and third most common titles for directors with short tenures, they are much less common for directors with long tenures. In fact, the second most frequently observed title for long-tenured directors is "Financial Service." Given this difference, we include control variables for these characteristics in all subsequent director-level analyses.

There is also a sizable difference between equity ownership and, consequently, monetary incentives among directors as tenure progresses. Director ownership includes both stocks and options, which can be exercised within 60 days of the annual meeting. Ownership increases from 0.063% in the L5 group to 0.088% in the G15 group. Although the stakes are small in percentage terms, the dollar amounts are high. We calculate dollar sensitivity to a 1% change in the underlying stock price by multiplying the total number of shares and options by 1% of the fiscal year-end price. Directors in the group G15 have a sensitivity of $13,318 to a 1% change in the stock price, while directors with less experience have approximately a third of the dollar sensitivity at $4,382. These differences are, once again, significant at the 1% level. A change of approximately 20% in the stock price can lead to a change in wealth of $315,460 for the median experienced director, which is a sizable effect.

In terms of board governance, poor attendance, an indicator variable that is set to one if the director does not attend 75% of the board meetings, decreases from 1.68% in the L5 group to 1.12% in the G15 group. Membership in the compensation committee increases from 36% in the L5 group to approximately 47% in the G15 group. While a similar increase is seen in the nomination committee, there is actually a small decrease in the likelihood of membership for G15 directors on the audit committee relative to L5 directors. This is probably due to the influence of Sarbanes-Oxley which mandated the presence of at least one director with financial expertise on the audit committee. This regulation led firms to bring in new directors with financial expertise onto the board to meet this requirement.

Panel A in Table II reports firm-level data from Compustat, RiskMetrics, and CRSP used in the sample. The size of the firms, on average, is large at approximately $15.87 billion. Size and other firm-level characteristics are comparable to other studies including Coles, Daniel, and Naveen (2008), Faleye, Hoitash, and Hoitash (2011), and Masulis and Mobbs (2011), which use the same database for their analysis. Panel B in Table II provides the composition of boards and committees according to the proportion of directors with specified tenures. On average, the proportion of independent directors with terms of 15, 12, and 9 years to the total number of independent directors is 0.14, 0.23, and 0.35, respectively.

II. Results

A. Board-Level Governance

1. Committee Membership

Board committees are delegated with important monitoring tasks, such as setting CEO compensation, choosing and reviewing auditors, and nominating new directors. Participation in these committees means attending special meetings and spending more time on board duties. Faleye et al. (2011) find that participation by a majority of independent directors in two or more committees improves the quality of the board's monitoring. Given the extra commitment required for committee membership, we construe participation in a committee as a signal of engagement with the firm.

Table III contains the results for ordinary least square (OLS) regressions where the dependent variable is an indicator variable that takes the value of one if the director is a member of any of the three major board committees (i.e., audit, compensation, and nomination). Among all of the independent directors, we construct five indicator variables indicating whether the director's tenure is lower than or equal to five years, between 6 and 10 years, between 11 and 15 years, between 16 and 20 years, or greater than 20 years. In Columns (1) to (5) of Table III, we regress the dependent variable on these five indicator variables separately. In Column (6), we pool these variables together, treating directors whose tenures are between 6 and 10 years as the omitted group. Finally, in Column (7), we use tenure directly as our key independent variable. All of the regressions include firm and year fixed-effects.

The results suggest that tenure has a distinct impact on committee memberships. Directors with tenures of less than or equal to five years are significantly less likely to become committee members, while directors whose tenures are between 11 and 20 years are more likely to become committee members. The discrepancy between directors with short and long tenures is a sensible result, given that new directors tend to be less knowledgeable of the firm's operations. Furthermore, once we pool the indicator variables together, the active committee involvement effect disappears for directors with tenure between 11 and 15 years and only remains significant for directors with tenure between 16 and 20 years. Interestingly, the coefficient for T > 20 appears significantly negative, suggesting that once a director's tenure exceeds 20 years, their involvement in committees begins to diminish. (3) Nevertheless, as Column (7) indicates, when we regress the dependent variable on director tenure directly, we observe a significantly positive relation indicating that experienced directors overall play an active role in the corporate governance of the firm through committee memberships.

Among the control variables, the results suggest that older directors and female directors are more likely to be committee members. Even though busy directors tend to have time constraints, they are also more likely to be committee members. To allow for the possibility that directors' involvement in board committees is also affected by the importance of the firm relative to their other directorships, we control for whether the director is an executive at another firm, and whether the firm is the largest (measured by total assets) in the director's directorship portfolio. (4) The results suggest that directors are more likely to be a committee member at firms that are the largest among all of their board seats.

As previously mentioned, we also control for whether the primary title of the director is Retired or Financial Service. Because this information is only available in RiskMetrics for a subset of years, we make an adjustment to these two variables to avoid losing observations. For each director in the database, once their primary title contains Retired (Financial Service) in a given year, we assume this director is retired (has experience in financial service) in all subsequent years where the information is missing. The results suggest that whether a director is retired does not affect their committee memberships, while having experience in financial service significantly increases the likelihood that the director is a committee member. In untabulated results, we find that this positive relation mainly exists in the audit and compensation committees, but not in the nomination committee.

2. Attendance

Attendance at board meetings is integral to the monitoring and advising duties of a director. Firms are required to report to the Securities and Exchange Commission (SEC) whether directors attended less than 75% of the meetings. In cases where the director has not attended 75% of the meetings, an indicator variable called "Poor Attendance" is set to one. In the sample of all independent directors, the mean of Poor Attendance is only 1.4% suggesting that missing of meetings is relatively rare. In this section, we examine whether attendance at board meetings changes for directors with different tenures.

We include control variables for individual director attributes similar to the previous section on committee membership. Adams and Ferreira (2008) show directors are more likely to attend meetings when meeting fees are higher. Therefore, information on meeting fees and the number of meetings from Execucomp are included as control variables. There is no data on these two variables from the year 2007 onward, so analysis is restricted to the years 1998-2006, leaving a total of 65,938 director-year observations. (5)

Table IV includes the results for OLS regressions where the dependent variable is Poor Attendance. Consistent with the evidence in Table III which suggests that new directors are less likely to be committee members, the evidence here indicates that these directors are also more likely to miss board meetings. In addition, even though Table III suggests that directors whose tenures are between 16 and 20 years have more committee memberships and, as such, a higher workload, Table IV implies that they are less likely to miss board meetings. The coefficient for these directors in Column (4) is -0.6%. Given the mean of Poor Attendance is 1.4%, G15 directors are 42.9% less likely to miss more than 75% of board meetings. Overall, the results indicate that director commitment to attending board meetings does not wane as their tenure increases.

The control variables in this table, in general, have less predictive power than those in Table III. Nevertheless, the results suggest that directors are more likely to miss board meetings when they are busy or when they are executives at other firms. They are also more likely to miss board meetings when there are more directors on the board or when the proportion of independent directors is higher. Finally, consistent with the findings in Adams and Ferreira (2008), the results suggest that attendance tends to increase with meeting fees.

B. Determinants of Experienced Directors

1. Firm-Level Analysis

This subsection analyzes the factors that drive the proportion of experienced directors to be higher in certain firms. The evidence in Tables III and IV suggests that directors with tenure greater than 15 years exhibit a significant improvement in terms of participating in committee activities and attending board meetings. Therefore, hereafter, we consider these directors as the experienced directors.

Panel A of Table V provides the results for regressions where the dependent variables are the proportion of experienced independent directors. We examine the determinants of the proportion of experienced directors on the compensation committee and the audit committee, in addition to the proportion of experienced directors on the entire board as they are also used as key explanatory variables in future analyses. Columns (1) to (3) use the Tobit procedure and include industry and year fixed-effects where differences across firms, but within the same industry, are examined. Columns (4) to (6) use OLS and examine within-firm variations using firm and year fixed-effects.

Overall, the results suggest that the proportion of experienced directors increases with CEO age. Similarly, the coefficient for CEO tenure is positively significant in regressions with industry fixed-effects, indicating that relative to other firms, directors and CEOs with longer tenures tend to coexist. However, the coefficient for CEO tenure is not significant in regressions with firm fixed-effects indicating that a higher proportion of experienced directors is not correlated with an increase in the tenure of the CEO within the firm. This is an intuitive result given that almost 90% of experienced directors no longer work with the CEO who was present when they were hired.

In terms of firm characteristics, the coefficient for firm size is negatively significant at the 1% level in regressions with industry fixed-effects, suggesting that relatively smaller firms are much more likely to have experienced directors. However, when firm fixed-effects are used, the coefficient for firm size is positively significant indicating that the proportion of experienced directors is increasing as a firm grows larger. Publicly listed firms (in the Compustat database) have grown in size over time. The positive relation between firm size and the proportion of experienced directors is reflective of this fact. As expected, firm age is highly positively significant at the 1% level in regressions using both industry and firm fixed-effects.

In terms of return on asset (ROA), the positive coefficient on five-year average ROA and the negative coefficient on the standard deviation of ROA (calculated using annual ROA over five years) in regressions with industry fixed-effects demonstrate the desire of experienced directors to be at relatively more stable and profitable firms. However, in Column (4), the coefficients of both ROA and its standard deviation show the opposite sign when firm fixed-effects are used. This negative relation between firm performance and the proportion of experienced directors can, to some extent, be explained by the findings in Fahlenbrach, Low, and Stulz (2013) that outside directors have incentives to resign from firms that they anticipate will perform poorly. Their findings imply that boards tend to experience a reduction in size during periods of poor performance as some directors may choose to leave the firm, while few directors will be willing to join the firm. In this case, if experienced directors, due to their long service, do not abandon the firm like some other directors do, then this might explain the relative increase in the proportion of experienced directors when the ROA is low.

Overall, the results confirm that firms that are smaller and older, and that have a more stable and higher level of accounting profitability, are more likely to have experienced directors on their boards. However, when firm fixed-effects are taken into account, it is not clear whether experienced directors have a direct role in improving or reducing profitability.

2. Director-Level Analysis

Next, we analyze characteristics that make a director more likely to become an experienced director. Following recent studies, such as Oyer (2008), Do, Nguyen, and Rau (2014), and Fahlenbrach et al. (2013), we employ Cox Proportional Hazards regressions to model the tenure of each independent director as a function of their personal attributes and certain firm-level and macroeconomic characteristics. In our sample, each directorship is traced until either the director leaves the firm (the event) or the firm leaves the sample. One advantage of using Cox models is that they allow for a possibility that the event (i.e., director turnover) might never occur during the observed period.

The results are reported in Panel B of Table V. We report hazard ratios rather than the raw coefficients as it is easier to infer the economic significance of the explanatory variables. In Column (1), we include only directors' personal attributes. In Column (2), we add firm and board characteristics. Since Do et al. (2014) find that macroeconomic factors can also influence a director's career, in Column (3), we bring in the value-weighted stock returns over the past three years at the industry level, as well as the industry return volatility. Given the potential influence on the director labor market brought by SOX (Chen and Moers, 2014), in Column (4), we replace year fixed-effects with an indicator variable that separates the pre-SOX and post-SOX period.

Because our events are when directors leave the firm, variables whose hazard ratios are greater than one are factors that negatively correlate with a director's probability of becoming experienced. Overall, our results suggest that directors above 65, female directors, busy directors, directors who are executives at other firms, and retired directors are less likely to stay very long. However, if the director only has one directorship, or if the directorship of interest is the largest among all their directorships, the director is less likely to leave.

Among the firm and board characteristics, the results suggest that directors are less likely to become experienced at larger, younger, and more complex firms, and firms in which the CEO has more power (captured by the CEO-Chairman duality) or the proportion of independent directors is higher. Furthermore, there is some evidence that directors are less likely to become experienced in volatile industries. Finally, the coefficient for the indicator variable Post-SOX is significantly negative, implying that directors are less likely to depart after SOX.

C. Board Monitoring

1. CEO Compensation

CEO compensation has shown a sharp increase since the 1970s (Frydman and Saks, 2010). There are two competing theories to explain this rise in executive pay. The first explanation is that executive pay is an optimal contracting solution to the agency problems faced by a firm. As the size and complexity of firms have increased, so has CEO compensation (Gabaix and Landier, 2008; Tervio, 2008). The second explanation is that high CEO pay is a form of rent extraction by powerful CEOs and they are able to exert "managerial power" and influence on the board's decisions (Bebchuk and Fried, 2003). In this section, we examine whether the concern that experienced directors amplify agency problems is justified by examining the relation between the proportion of experienced directors on the board and total CEO pay.

Data on CEO compensation are from Execucomp and are for the fiscal years 1998-2013. Total pay includes salary, bonus, equity, and long-term incentive pay. There are a total of 19,020 firm-year observations with matching CRSP, Compustat, RiskMetrics, and Execucomp data. Observations for the year 1998 are excluded since compensation for the CEO is determined by the board from the previous year, and board structure data are only available from 1998. Execucomp changed its reporting of CEO option valuation in 2006, which does not allow for consistent within-firm and across-firm comparisons of total compensation. To allow for an accurate comparison, we calculate CEO option compensation using a consistent methodology as described in detail in the Appendix. Compensation is also adjusted for inflation using the consumer price index (CPI) deflator for the year 2003. The mean total annual compensation for the entire sample is $4.62 million, while the median is $2.37 million (in 2003 dollars). There is a large difference in the mean and the median, indicating, as is widely known, that the distribution of compensation is skewed. Hence, log transformed compensation is used as the dependent variable. Since remuneration decisions are made by the compensation committee, the ratio of experienced directors on the compensation committee to the total number of directors on the compensation committee is used as the key explanatory variable. The variable PROP-CC-G15 is used to denote the proportion of independent directors with tenures greater than 15 years on the compensation committee.

Table VI provides the results of regressions where log transformed compensation is the dependent variable. In Column (1), when firm and year fixed-effects are used, the coefficient for PROP-CC-G15 is -0.095 and is significant at the 5% level. The average size of the compensation committee is three members and the addition of one experienced director will raise the proportion of experienced directors by 33%. The results in Column (1) indicate that a change from no experienced director on the compensation committee to one such director will reduce CEO compensation by 3.2% or $147,712 which is an economically significant effect, especially given that we are examining within-firm variations. To distinguish the effect of experienced directors from those who are not hired during the term of the CEO, Column (2) includes the subsample of firm-year observations where CEO tenure is greater than or equal to that of all the independent directors. In this subsample, all of the directors will have the potential to have been influenced by the CEO. The results remain significant in this subsample.

In Column (3), the regression does not treat independent directors hired by the current CEO as experienced. Doing so should produce stronger results as directors hired prior to the current CEO are unlikely to be coopted by the current CEO. Consistent with this conjecture, the coefficient for PROP-G15-CC in Column (3) is both economically and statistically more significant than that in Column (1). In Column (4), the regression uses industry and year fixed-effects and also controls for the proportion of directors hired during the term of the CEO on the compensation committee. The coefficient for experienced directors is also significant at the 5% level.

These regressions have not controlled for the possibility of selection bias that may arise when firms retain "better" directors. If this was indeed the case, results suggesting that experienced directors help mitigate agency conflict would not be surprising. To address this concern of selection bias, Column (5) uses director fixed-effects that allow the examination of within-director variations as tenure changes. One complication that arises when using director fixed-effects is a change in the methodology of setting director identification numbers by RiskMetrics in the year 2003. To address this issue, we match directors within firm using name (first, middle, and last) and director age to ensure that a consistent ID is used through the tenure of a director. (6) The key explanatory variable in this regression is an interaction variable between G15 and being a compensation committee member. This variable is significant at the 10% level with a coefficient of -0.036 indicating that the presence of an experienced director on the compensation committee is correlated with lower pay for the CEO.

2. CEO Turnover

Boards are tasked with monitoring the leadership of a firm and initiating changes in case of poor performance (Adams, Hermalin, and Weisbach, 2010). The literature indicates that board characteristics play an important role in the decision to dismiss a CEO. The factors linked to a higher probability of CEO dismissal include higher equity-based compensation and higher stock ownership for directors (Ertugrul and Krishnan, 2010), splitting CEO and chairman duties (Goyal and Park, 2002), a majority of independent directors serving on at least two of the three monitoring committees (Faleye et al., 2011), smaller boards (Yermack, 1996), higher independence of the board (Weisbach, 1988), and the presence of female directors on the board (Adams and Ferreira, 2009). In this section, we examine whether boards with a higher proportion of experienced directors increase CEO turnover sensitivity to performance.

The dependent variable in this section is an indicator for CEO dismissals that takes a value of one when the CEO is in their last year and zero otherwise. The indicator variable also has a value of zero where the reason for CEO leaving has been marked as "Deceased" or "Retired" by Execucomp. The turnover sample ends in the year 2013. There are 1,939 dismissals in the sample of 17,536 firm-year observations, yielding an unconditional probability of 11.06%. The intentions of the board and the CEO are not always clear, making the process of identifying CEO dismissal extremely prone to error. Thus, similar to Jenter and Lewellen (2010) and Adams and Ferreira (2009), all CEO dismissals are included in the sample. To identify the effect of experienced directors on CEO departures in the case of poor performance, we include the interaction term between stock returns and the proportion of experienced directors as an independent variable. Stock returns are calculated as the previous year's firm stock returns minus the previous year's return on the value weighted CRSP market index. Other than this additional interaction term, the control variables are the same as in the previous section on compensation.

Results for the regressions on CEO turnover are in Table VII. In Column (1), with firm and year fixed-effects, the interaction term between stock returns and PROP-G15 is negatively significant at the 5% level. This negative coefficient for the interaction term indicates that there is a greater likelihood of CEO turnover when the firm performs poorly and there are experienced directors on the board. There is also a positive coefficient for the interaction term between stock returns and % CEO-Hire, demonstrating that the directors who were hired after the CEO are less likely to dismiss a CEO even when the firm performs poorly. In contrast to experienced directors, directors hired after the CEO exacerbate concerns about agency problems on the board. The two effects are distinct since the interaction terms using both sets of variables are significant.

In order to further examine whether experience is just another way of looking at directors who were not hired prior to the CEO, we examine the subset of observations where the CEO has a longer tenure than any of the independent directors in Column (2). Within-firm variation in CEO turnover and a corresponding change in the proportion of experienced directors is not possible given the sample size. As such, we use industry and year fixed-effects in Column (2). The coefficient of the interaction between PROP-G15 and stock returns is similar in magnitude to the coefficient in Column (1), but the significance drops to the 10% level. In Column (3), we do not consider directors as experienced if they are hired by the current CEO. Once again, the results are stronger in this column. In Column (4), the regression includes all of the observations with industry and year fixed-effects. The coefficient for the interaction variable is again significant at the 5% level. Finally, in Column (5), we examine the within-director variation by using director fixed-effects. The interaction term G15*CC in this column is significant at the 1% level. Overall, the results provide little evidence of the ability of the CEO to entrench himself in the face of poor performance if there are experienced directors on the board.

3. Earnings Restatement

Although earnings manipulation can lead to large losses in reputation for firm management, financial incentives sometimes outweigh these concerns as managers seek to maximize performance-linked payouts or retain their jobs by manipulating accounting figures in the financial statements. The audit committee is responsible for appointing and evaluating auditors and providing oversight concerning the integrity and compliance of company financial statements to reduce the likelihood of such earnings manipulation, which can result in large shareholder losses. Previous research has found that board independence and the presence of a financial expert can reduce (Klein, 2002; Agrawal and Chadha, 2005) and the presence of foreign directors on the audit committee can increase (Masulis et al., 2012) the probability of financial misreporting. In a similar vein, we examine the propensity of firms to misreport earnings when experienced directors are on the audit committee.

Data on accounting restatements are from the US Government Accountability Office (GAO) database, which released reports in 2003 and 2007 containing a list of financial statements that were incorrect on their release date. The reason for the inaccuracy could stem from either an error (unintentional reporting) or irregularities (intentional misreporting) and it is important to distinguish between the two effects (Hennes, Leone, and Miller, 2008). In addition, these reports released by the GAO list the date when the correction was made to the financial statements, but do not list the reporting period when the original infraction occurred. To address these two concerns in the data, we use modified versions of these reports obtained from Masulis et al. (2012) for the report released in 2007 (restatements from 2003 to 2006) and Burns and Kedia (2006) for the report released in 2003 (restatements from 1997 to 2002). (7) These modified reports include the misreported years and quarters and also use the Hennes et al. (2008) methodology to classify restatements as errors or irregularities.

We use the proportion of experienced directors on the audit committee (PROP-AC-G 15) as the key independent variable. Table VIII contains the results for logistic regressions that use industry and year fixed-effects. There is limited within-firm variation of earnings restatements. As such, we do not use firm fixed-effects in the analysis. The control variables are similar to those used in previous sections. The dependent variable in Column (1) is an indicator variable that takes a value of one when a firm makes an earnings restatement and zero otherwise. The coefficient for PROP-AC-G15 is not significant in this regression. In Column (2), the dependent variable is an indicator variable that takes a value of one when the earnings restatement is classified as an irregularity and the restatement is more likely to be due to a lapse in board monitoring. In contrast to the results on all earning restatements, the results in Column (2) indicate that the coefficient for PROP-AC-G 15 is -1.36 and is negatively significant at the 5% level. The marginal effect is -0.011 suggesting that adding one director with tenure greater than 15 years on the audit committee, where none existed, will decrease the probability of an irregular earnings restatement by about -0.36% (0.33* -0.11). This is an economically significant effect as the unconditional probability of an irregular earnings restatement is just 1.5%. Thus, the presence of an experienced director can reduce the occurrence by about 25%.

Columns (3) and (4) repeat the analysis from Columns (1) and (2), but use the subset of firms where the tenure of the CEO is greater than that of the independent directors. These regressions continue to confirm that the presence of experienced directors on the audit committee is less likely to be associated with intentional misreporting, even in cases where the CEO and the experienced directors have had a chance to build a strong relationship over long tenures. Finally, in Columns (5) and (6), we do not consider a director as experienced if they are hired by the current CEO. Our key independent variable PROP-AC-G15 remains significantly negative in the Irregularities sample. Overall, the results provide strong support for the hypothesis that the presence of experienced directors on the board alleviates agency problems as these firms have a lower propensity to misreport earnings intentionally.

D. Board Advising

Besides monitoring management, directors serve as advisors, playing a key role in important strategic decisions like making and choosing acquisitions (Adams et al., 2010). Experienced directors develop expertise in the industry and firm on whose board they serve through their long tenures exposing them to the company's strategy, finances, and competitive environment. Recent research has explored the conflict between the advising and monitoring of management that arises because independent directors are dependent on the CEO (Adams and Ferreira, 2007) or inside directors (Harris and Raviv, 2008) for firm-specific information. The first best solution to the trade-off between monitoring and advising in Adams and Ferreira (2007) is the sharing of information by managers, so that the boards can both monitor management effectively and give quality advice. An alternative may be the presence of experienced directors who have built firm-specific knowledge and may not be totally reliant on management for information. Their reduced dependence on management as a source of information would allow these directors to fulfill their roles as both monitors and advisors.

In this section, two aspects of this advisory role are examined. First is the decision to pursue acquisitions. Roll (1986) posits that takeovers are a sign of management hubris. We test the hypothesis that directors with long tenures may build relationships with the CEO and facilitate this hubris to retain their positions and ensure reelection (Bebchuk and Fried, 2003). Next, we examine the hypothesis that experienced directors can provide advisory benefits to the firm by testing whether the presence of experienced directors on the board is associated with higher quality acquisitions.

1. Decision to Pursue Acquisition

The Securities Data Commission (SDC) database is used to obtain data on deals and the criteria in Masulis, Wang, and Xie (2007) is followed to identify acquisitions. Transactions where the acquisition is completed and the acquirer controls less than 50% of the target's shares prior to the announcement and owns 100% of the target's shares after the transaction are included. Deals must be larger than $1 million and at least 1% of the acquirer's market value of equity, as measured on the 11th trading day prior to the announcement date. In addition to these conditions, deals where the acquirer is making multiple deals on the same day are excluded (Faleye et al., 2011). After including only those observations that have information on director attributes in RiskMetrics, stock data from CRSP, and accounting data from Compustat, the sample contains 3,599 acquisitions.

In addition to the control variables from the previous sections, firm-level accounting variables, like free cash flow and leverage, which have been used in the merger and acquisitions literature, are included. The dependent variable is an indicator variable that is set to one when a firm decides to pursue one or more acquisitions within the fiscal year. In Table IX, Column (1) uses firm and year fixed-effects. The coefficient for PROP-G15 is negatively significant at the 10% level with a coefficient of -0.05. Using an average board size of nine, an increase in one experienced director will lead to a 0.56% decrease in the probability of a merger. In Column (4), industry and year fixed-effects are used and the coefficient for PROP-G15 remains negative and significant at the 10% level. The importance of tenure can again be seen in Column (5), where director and year fixed-effects are used. The coefficient for the PROP-G15 variable is significant at the 10% level indicating that the likelihood of acquisitions is lower even when examining within-director variation. Overall, the results imply that director term limits would rid the board of a counterbalance to the CEO in the board room.

2. Acquirer Returns

This section examines whether experienced directors assist firms in making more profitable acquisitions, using a commonly employed event study methodology that utilizes cumulative abnormal returns (CAR). Acquisitions are chosen under the same methodology as in the previous section. Firm-level accounting data and board structure data from the year prior to the acquisition is used. CAR forbidding firms is calculated as in Masulis et al. (2007). First, the market model is estimated using daily stock returns data from CRSP for the 200-day period from Event Day--210 to Event Day--11. Then, the CAR are calculated over five days, two days before and two days after the announcement day. In this sample, the median CAR is 0.257% and the mean CAR is 0.208%.

In addition to the control variables from the previous sections, variables deemed important in previous studies on mergers and acquisitions (M&A) are also included, such as deal size (Moeller, Schlingemann, and Stulz, 2004), percentage of payments made in cash (Travlos, 1987), different industry (Morck, Shleifer, and Vishny, 1990), private company (Chang, 1998), and takeover defenses (Masulis et al., 2007). RiskMetrics data on two other corporate governance mechanisms related to management entrenchment and the market for corporate control are also used. The first variable (Staggered Board) denotes whether a firm elects only a fraction of its directors to the board during annual elections. The second variable (GIM as in Gompers, Ishii, and Metrick, 2003) counts the incidence of 24 governance rules as a proxy for shareholder rights. The GIM index is only updated every other year, so we assume the value does not change unless it is updated in the database.

Table X provides the results for OLS regressions where the dependent variable is the five-day CAR, multiplied by 100. Since this is an event study with small or no within- firm variation, we only use industry and year fixed-effects for all of the regressions. The coefficient for PROP-G15 in Column (1) is significant at the 1 % level with a magnitude of 1.84. In Column (2), the GIM index is used as a control variable, while in Column (3), the Staggered Board variable is used as a control variable. The coefficient for PROP-G15 continues to remain significant at the 1% level in these regressions with a magnitude similar to that of Column (1). Furthermore, in Columns (4) to (6), we again repeat the regressions, but do not treat directors hired by the current CEO as experienced. The results in these three columns remain significant, but the level of significance appears to be slightly lower than that in Columns (1) to (3). Overall, the evidence presented here suggests that experienced directors can provide significant advisory benefits to firms as their presence on the board can lead to significantly better quality acquisitions as measured by announcement day returns.

III. Robustness Tests and Additional Results

Thus far, our results suggest that experienced directors facilitate effective board monitoring and advising. The use of firm fixed-effects and director fixed-effects helps to eliminate some unobservable factors. Nevertheless, some self-selection issues remain. Specifically, the presence of an experienced director is the joint outcome of both the director deciding to stay in the firm and the firm deciding to retain the director. Both the director's and the firm's decisions are made endogenously. We discuss and address these issues in this section.

A. Directors Selecting Firms

We first consider the possibility that directors are only willing to stay in better firms. Being associated with better performing firms helps directors to build better reputations and is less time consuming. The results in the firm-level determinants section (Panel A of Table V) confirm that firms with and without experienced directors tend to differ in a number of dimensions. To minimize the impact of these differences, in this subsection, we use the regressions in Panel A of Table V as a propensity score model and match firms that have at least one experienced director to their comparable firms that do not have experienced directors.

The propensity score model estimates a likelihood of having an experienced director based on certain observable characteristics for each firm. This estimated likelihood can then be used to match firms that are as similar as possible apart from the presence of an experienced director. Our model includes all of the explanatory variables in Table V, Panel A. We estimate a probit model where the dependent variable is an indicator variable that is equal to one if the firm has at least one experienced independent director and zero otherwise. After obtaining the propensity score for each firm, we match our treatment firms to control firms that: 1) are from the same Fame-French 48-industry group and 2) have propensity scores no greater than or less than the treatment firm's score by 5%. Some of our firm-level outcomes (e.g., CEO compensation and financial restatements) concern only a specific board committee rather than the entire board. In this case, the treatment firms refer to those that have at least one experienced director in the committee of interest, while the control firms are firms that have no experienced independent directors at the board.

Table XI reports the results. Our firm-level analysis contains five different dimensions including 1) CEO compensation, 2) CEO turnover, 3) financial irregularities, 4) acquisition decisions, and 5) acquisition CARs. Correspondingly, each of the five columns in Table XI represents one dimension. The key explanatory variable, PROP-G15, refers to the ratio of experienced independent directors to all independent directors for CEO turnover, acquisition decisions, and acquisition CARs tests. Since CEO compensation (financial irregularities) concerns only the compensation (audit) committee, PROP-G15, in this test, refers to the ratio of experienced independent directors on the compensation (audit) committee only. To save space, some control variables that are specific to certain dimensions only (e.g., stock return in CEO turnover and M&A characteristics in acquisition CARs) are included in the regressions but not reported in the table.

The matching, on average, reduces the sample size by 25%. Nevertheless, the variable PROP-G15 is still significantly negative (positive) in the financial irregularities (acquisition CARs) test. For the CEO turnover test, the interaction term of PROP-G15 and stock returns remains significantly negative. Thus, even though the results in this table are relatively less strong, they still indicate that our findings cannot be solely explained by experienced directors staying longer in better firms.

B. Firms Selecting Directors

The second concern we consider is the possibility that firms only retain better directors on their boards over time. If this was the case, then a higher proportion of experienced directors might be equivalent to a higher proportion of high-quality directors, which makes it unsurprising that these directors facilitate more effective monitoring and advising. To deal with this issue, we make further use of the director fixed-effects. Specifically, we first focus on experienced directors who have multiple directorships in the same year and compare their performance (both at the director level and the firm level) across these directorships. If our results are capturing the effect of director quality, rather than the effect of director tenure, then cross-sectionally, a director should exhibit no differences between boards on which they have been a director for over 10 years and boards on which they have been a director for three years.

To determine whether this is true, we restrict our sample to directors who: 1) have more than one directorship in a given year and 2) have a tenure of more than 12 years in at least one directorship and a tenure of less than five years in at least one directorship. (8) The results are presented in Panel A of Table XII. In Columns (1) and (2), we examine these directors' committee memberships and meeting attendance. In doing so, we rerun the regressions in Tables III and IV, but include director x year fixed-effects. As such, we drop variables that have no variation within the same director in a given year (e.g., age and gender). Our key independent variable is director tenure. The coefficient for director tenure is positive and significant at the 10% level in the Committee Membership test and is insignificant in the Poor Attendance test, suggesting that these directors are more likely to be committee members at firms where they are relatively more experienced.

Next, we examine whether the monitoring and advising are more effective in firms where these experienced directors have stayed for a longer time period as compared to firms that they have joined recently. The sample size drops significantly as we only include firm-year observations where at least one independent director has more than one directorship and is experienced in some directorships and inexperienced in some others. Due to these restrictions, we exclude Acquisition CARs from our analysis. We also replace the logit regression in Financial Irregularity with an OLS regression. In addition, for the CEO Compensation and Financial Irregularity tests, we have very few observations if we require the director to be on the compensation/audit committee in all of the directorships that they have. Therefore, in this section, we do not implement such a restriction. As the results indicate, even within the much smaller samples, firms in which these directors are experienced make CEO turnover more sensitive to performance, and are less likely to restate earnings due to irregularities, than firms where these directors are relatively less experienced.

To further investigate whether the positive impact experienced directors bring to the firm is really driven by the experience they accumulate over time, in Panel B of Table XII, we repeat the above tests, but replace director x year fixed-effects with director x firm fixed-effects. To this end, we restrict our sample to firms that have experienced directors and we require that the data for these firms are available for at least one year, both when the tenure of the experienced director is below five years and when the tenure of the experienced director is over 12 years. Similar to the tests in Panel A, we first examine directors' committee memberships and meeting attendance. We drop control variables that have no variation within each director-firm combination (e.g., gender), and variables that have extremely high correlation with tenure (e.g., director age, firm age). For the Meeting Attendance test, we also have to drop Director Meeting Fee and Number of Meetings. These two variables from Execucomp are only available until 2006 and, by construction, we have very few observations in this section if our sample period ends in 2006. As Columns (1) and (2) in Panel B indicate, as a director's tenure increases, they are significantly more likely to be a committee member and significantly less likely to miss board meetings.

At the firm level, our methods are similar to those in Panel A with two exceptions. The first is that the regressions in Panel B include director x firm fixed-effects rather than director x year fixed-effects. The second is that we exclude Firm Age from the control variables. Overall, the results in Panel B suggest that as a director's tenure at a firm increases, the firm's CEO turnover-performance sensitivity increases, the probability to restate earnings due to irregularities decreases, and the propensity to attempt M&A transactions decreases. These results indicate that directors do exhibit a significant improvement in the effectiveness of their monitoring and advising roles as their tenures increase over time.

C. General Experience versus Firm-Specific Experience

The third issue we consider is whether the experience that makes directors more effective at monitoring and advising can be any directorship experience. Our argument is that experienced directors become better due to their long service at the firm. However, if directors are able to apply the experience they accumulate across boards, then they do not have to accumulate experience by always staying at the same firm, and firms can easily replace long-tenured directors with directors who have served on many boards in the past. In this subsection, we examine how our results change when we replace our variables related to director tenure with some variables that directly measure directors' general experience.

To measure general experience, we use the number of S&P 1500 directorship-year observations the director has had over the past five years. Since directors with tenure longer than 15 years account for 14% of our independent directors sample, we choose the threshold of nine directorship-years as it also gives us approximately 14% experienced directors in the sample. That is, a director who has had five directorships each year for two years and a director who has had two directorships each year for five years are both considered as experienced directors in this section. Thereafter, we calculate the proportion of these directors on boards and on audit/compensation committees and use these values as our key independent variables. As the results in Table XIII suggest, having a large proportion of these directors does not facilitate more effective monitoring or advising. The only positive impact of these directors is that they tend to make less acquisition attempts. However, at the same time, a larger proportion of these directors on the compensation committee appears to increase CEO compensation. Overall, the results in this section are largely different from those in previous sections, suggesting that general directorship experience is not a substitute for firm-specific experience.

IV. Conclusion

Advocates for improving corporate governance and regulators recommend term limits for independent directors. The premise is that new directors will infuse innovative ideas and energy into the boardroom and will also be less likely to align with the CEO when the time comes to set compensation and consider leadership changes. A contrasting hypothesis in support of experienced directors stems from the fact that these directors have significant equity stakes in firms, have experience dealing with multiple CEOs, and have had an opportunity to learn about the business and the industry. In this paper, we study whether calls for term limits are justified by examining how the presence of experienced directors on boards affects firm policies.

We use data from S&P 1500 companies over 16 years to examine monitoring and advising outcomes using the proportion of directors with a tenure greater than 15 years (an experienced director) as the key explanatory variable. We find that CEOs in firms with a larger number of experienced directors tend to have lower compensation and are more likely to leave when the firm performs poorly. These firms are also less likely to make earnings restatements. Firms with a higher proportion of experienced directors are also less likely to make acquisitions and those that are made are more likely to be profitable. The results on both monitoring and advising outcomes suggest that experienced directors provide a balance of power in the boardroom.

This paper also provides evidence regarding the trade-off between the advising and monitoring roles of board members. Previous research indicates that excessive monitoring of the CEO leads to the possibility that managers withhold information from the board, compromising advising quality. However, experienced directors may have developed firm-level expertise over their tenure and not be totally dependent on management for insight into firm operations. The results indicate that the presence of these directors on boards leads to better strategic advice and better monitoring concerning decision making. Overall, the results confirm that experienced directors make a valuable contribution to corporate governance within firms.

Appendix

The Financial Accounting Standards Board (FASB) issued FAS 123 in October 1995 that encouraged firms to report their equity based compensation using a fair-value based method of accounting. The intention was to provide a more realistic valuation of the payment to executives compared to previous methods (APB 25) whereby stock option grants were often recognized without any compensation cost. FASB introduced FAS 123R at the end of 2004, which made the optional implementation of fair-value based accounting mandatory for all public firms. Subsequently, Execucomp changed its methodology for equity-based compensation from the fiscal year 2006 onward to incorporate FAS 123. (9)

Prior to fiscal year 2006, Execucomp calculated stock option grants using its own standardized Black-Scholes methodology. After fiscal year 2006, Execucomp reported the value of the option grants as calculated by individual firms. Since firms may use their own internal models to value stock option grants, annual option compensation cannot be compared across firms after 2006. There will also be a difference in option valuation within firms before and after fiscal year 2006. We follow Kini and Williams (2012) and Coles et al. (2014) and use the pre-2006 Execucomp methodology to calculate option awards for all years and all firms to ensure that compensation is comparable.

The pre-2006 Execucomp methodology used the following inputs:

* A grant date of July 1 is used for all options in a given fiscal year. To account for the fact that executives often exercise their options early, the time to maturity of the option was set to 70% of the actual time to maturity. This number was then rounded to the nearest whole number.

* The seven-year risk free rate of a US Treasury bond.

* The 60-month stock volatility is used. If there are fewer than 12 months are available, then the volatility of the S&P 1500 is used. Otherwise, if there are fewer than 60 months available, then those number of months are used. The data are winsorized at the 5th percentile and the 95th percentile.

* The average dividend yield over the previous three years is used. The data are winsorized at the 5th percentile and the 95th percentile.

* The company specified strike price and market price of the option were used.

In order to ensure the correctly replicated Execucomp methodology, we calculate the option valuation of all firms in all years before 2006 and obtain a correlation of 0.9973. We then calculate total compensation using the formula below:

Total Compensation = SALARY + BONUS + OTHANN + ALLOTHTOT + RSTKGRNT + option_awards_calculated_value + LTIP.

The only change in our calculation from the Execucomp calculated total compensation, TDC1, is the calculation of the option awards. We find the correlation between total compensation measures is 0.996.

After the year 2006, we again calculate option values and leave all of the other inputs the same. Prior to 2006, all inputs were available in the Execucomp table Stock Option Grants 1992 Format. After 2006, the number of options granted and the exercise price used are from the Execucomp table Plan Based Awards, while the exercise price is inferred from the Execucomp table Outstanding Equity Awards using exercise price and number of options in the grant.

Total Compensation = SALARY + BONUS + NONEQJNCENT + OTHCOMP + STOCK_AWARDS_FV + option_awards_calculated_value + DEFER_RP _AS_COMP_TO.

The correlation between our calculation of total compensation and TDC1 from Execucomp is unsurprisingly a bit lower at 96.6%.

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Travlos, N., 1987, "Corporate Takeover Bids, Methods of Payment, and Bidding Firms' Stock Returns," Journal of Finance 42, 943-963.

Vafeas, N., 2003, "Length of Board Tenure and Outside Director Independence," Journal of Business Finance & Accounting 30, 1043-1064.

Weisbach, M., 1988, "Outside Directors and CEO Turnover," Journal of Financial Economics 20,431--460.

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Young, C., 2011, "Boards: When Best Practice Isn't Enough," McKinsey Quarterly, June.

(1) UK Corporate Governance Code (June 2010). Publicly listed companies on the London Stock Exchange are required to state how they have complied with this code.

(2) "The 40-Year Club: America's Longest-Serving Directors," Wall Street Journal, July 16, 2013, http://online. wsj.com/news/articles/SB10001424127887323664204578607924055967366.

(3) In untabulated results, we find that the effect of tenure remains significantly positive until it reaches 27 years.

(4) This indicator variable is also equal to one if the director has only one directorship.

(5) As a robustness check, we perform our analysis using data for all years, without the meeting fees and number of meetings variables, and the results are quantitatively similar.

(6) See Coles et al. (2014) for a detailed description of the problem.

(7) We thank Natasha Burns, Simi Kedia, Ron Masulis, Cong Wang, and Fei Xie for providing us with the modified earnings data.

(8) The decision to reduce the threshold from 15 to 12 years in this case is to obtain sufficient observations.

(9) Please refer to http://www.fasb.org/summary/stsum123r.shtml for details on FAS 123R and http://www. fasb.org/summary/stsum123.shtml for details on FAS 123.

We would like to thank Renee Adams for her extensive guidance on this paper. We would also like to thank an anonymous referee, Raghu Rau (Editor), Ron Masulis, Peter Pham, Daniel Metzger, Fariborz Moshirian, Bohui Zhang, Sarah Azzi, Rasha Ashraf Matthias Thul, JingXu, and participants at the 2013 FIRS Conference and the 2013 FMA Annual Meeting for their valuable suggestions.

Ying Dou, Sidharth Sahgal, and Emma Jincheng Zhang *

* Ying Dou is a Ph.D. Candidate in the School of Banking and Finance, University of New South Wales in Sydney, New South Wales, Australia. Sidharth Sahgal is the Managing Director at Macrovue Pty Ltd. Emma Jincheng Zhang is a Ph.D. Candidate in the School of Banking and Finance, University of New South Wales in Sydney, New South Wales, Australia.

Table I. Director Attributes by Tenure

The sample consists of 139,963 independent director-level
observations. Observations are included if they have director data
from RiskMetrics, accounting data from Compustat, stock return data
from CRSP, and CEO attributes from Execucomp. Poor Attendance is an
indicator variable that is equal to one when the director does not
attend at least 75% of board meetings. Former Employee is an
indicator variable that is equal to one when the director is a former
employee. Hired by CEO is an indicator variable that is equal to one
if director tenure is less than or equal to CEO tenure. Number Boards
is the number of boards of other firms the director sits on. The
committee membership and leadership flags are all indicator variables
with one indicating membership or leadership of the committee. %
Ownership is the total number of shares and options that can be
exercised within 60 days of fiscal year-end divided by shares
outstanding. The significance test in Column (G) is based on the
nonparametric Mann-Whitney-Wilcoxon test for the differences between
Columns (D) and (F).

                          (A)           (B)           (C)

                                      T [less     5 < T [less
                                      than or       than or
                          All       equal to] 5   equal to] 15

Attributes

Count                  139,963        54,260        65,889
Age                    61.801         58.328        62.842
Tenure                  7.723          2.160         8.491
Female                 14.012%        16.152%       13.829%
CEO                    11.769%        15.557%       10.493%
Poor Attendance         1.441%         1.675%        1.345%
Former Employee         0.259%         0.116%        0.235%
Number Boards           0.956          0.960         1.007
Hired by CEO           38.487%        62.551%       27.176%
Three most              Retired       Retired       Retired
  frequent             Fin'l Svce    Executive     Fin'l Svce
  primary titles       Executive        CEO          Other

Committee Membership

Compensation           41.331%        36.133%       44.027%
  committee
Audit committee        42.387%        42.908%       42.663%
Nomination             36.741%        30.982%       39.753%
  committee
Compensation +          1.201          1.100         1.264
  Audit +
  Nomination

Committee Leadership

Compensation           10.039%         5.352%       12.694%
  committee
Audit committee        10.202%         7.311%       12.079%

Equity Ownership

% Ownership--           0.205%         0.199%        0.197%
  mean
% Ownership--           0.074%         0.063%        0.079%
  median
Dollar sensitivity--     68,660        34,286        53,821
  mean
Dollar sensitivity--     5,109          1,977         7,799
  median

                           (D)           (E)

                         T [less
                         than or
                       equal to] 15     T > 15

Attributes

Count                    120,149      19,814
Age                      60.804       67.839
Tenure                    5.632       20.402
Female                   14.878%       8.762%
CEO                      12.813%       5.348%
Poor Attendance           1.494%       1.120%
Former Employee           0.181%       0.732%
Number Boards             0.986        0.774
Hired by CEO             43.151%      10.205%
Three most               Retired       Retired
  frequent              Executive     Fin'l Svce
  primary titles        Fin'l Svce      Other

Committee Membership

Compensation             40.462%      46.598%
  committee
Audit committee          42.774%      40.042%
Nomination               35.792%      42.495%
  committee
Compensation +            1.190        1.264
  Audit +
  Nomination

Committee Leadership

Compensation              9.378%      14.046%
  committee
Audit committee           9.926%      11.875%

Equity Ownership

% Ownership--             0.198%       0.249%
  mean
% Ownership--             0.072%       0.088%
  median
Dollar sensitivity--       44,999      210,525
  mean
Dollar sensitivity--       4,382        13,318
  median

                          (F)           (G)

                         T > 15       (F) - (D)

Attributes

Count                  18,398
Age                    67.834         7.030 ***
Tenure                 20.380        14.748 ***
Female                  8.816%       -6.062% ***
CEO                     5.391%       -7.422% ***
Poor Attendance         1.124%       -0.370% ***
Former Employee         0.000%       -0.181% ***
Number Boards           0.778        -0.208 ***
Hired by CEO           10.229%      -32.922% ***
Three most              Retired
  frequent             Fin'l Svce
  primary titles         Other

Committee Membership

Compensation           46.647%        6.185% ***
  committee
Audit committee        39.911%       -2.863% ***
Nomination             42.422%        6.630% ***
  committee
Compensation +          1.263         0.073 ***
  Audit +
  Nomination

Committee Leadership

Compensation           14.083%        4.705% ***
  committee
Audit committee        11.861%        1.935% ***

Equity Ownership

% Ownership--           0.250%        0.052% ***
  mean
% Ownership--           0.088%        0.016% ***
  median
Dollar sensitivity--    209,903      164904 ***
  mean
Dollar sensitivity--     13,233       8851 ***
  median

*** Significant at the 0.01 level.

** Significant at the 0.05 level.

* Significant at the 0.10 level.

Table II. Firm-Level Summary

The sample consists of 19,020 firm-level observations from 1998 to
2013. Independent Directors is the number of independent directors
divided by the total number of directors. A busy director serves on
three or more firms. Busy Board is an indicator set to one if half
or more of the independent directors are busy directors. A director
is hired after CEO if they are appointed during the term of the
current CEO. All accounting data are based on year-end values unless
explicitly noted. Assets are also stated in inflation adjusted
dollars. The inflation adjustment is made using the CPI Index and
the year 2003 as the base year. Tobin's q is (Assets - Book Equity +
Market Equity)/Assets. R&D is research and development expenses
divided by assets. Pays Dividend is an indicator variable equal to
one for firms that pay a dividend. Leverage is the sum of short-term
debt and long-term debt divided by assets. Free Cash Flow is (Net
Cash Flow from Operation Activities + Dividends Paid)/Assets. Stock
Return is the one year firm stock return minus the CRSP value
weighted index. Return on Assets is EBITDA divided by the previous
year-end assets. Earned Equity is retained equity divided by book
equity. Asset Growth is the percentage growth in assets. CEO Total
Compensation is the sum of salary, bonus, equity, and long-term
incentive pay. The GIM Index is a variable averaging the incidence
of 24 governance rules to proxy for shareholder rights. Staggered
Board is an indicator variable set to one if elections for all board
members are not in the same year. CAR is the cumulative abnormal
return that is calculated over a five- or three-day period using the
residuals of the market model. The parameters of the market model are
estimated using data from Event Day -210 to Event Day -11.

Panel A. Firm Summary Statistics

                                                                Std
                                         Mean      Median    Deviation

Board
Number of Directors                      9.570      9.000      2.890
Independent Directors                    0.739      0.778      0.157
Busy Board                               0.286      0.000      0.452
Hired after CEO                          0.384      0.333      0.362
Hired after CEO on Comp Committee        0.331      0.250      0.370
Firms with at least one Independent      0.592      1.000      0.491
  Director with tenure [greater
  than or equal to] 15 years
Firms with at least one Independent      0.740      1.000      0.439
  Director with tenure [greater
  than or equal to] 12 years
Firms with at least one Independent      0.860      1.000      0.347
  Director with tenure [greater
  than or equal to] 9 years

Firm Characteristics
Assets Inflation Adjusted (millions)    15,873      2,024     84,215
Log (Assets Inflation Adjusted)          7.778      7.613      1.700
Shareholders' Equity (millions)          3,292        774     10,568
Market Equity (millions)                 8,784      1,786     27,274
Tobin's q                                1.881      1.438      1.425
Leverage                                 0.224      0.208      0.185
R&D Expenses                             0.025      0.000      0.054
Pays Dividend                            0.614      1.000      0.487
Free Cash Flow                           0.099      0.090      0.075
Market-to-Book                           1.315      0.894      1.507
Cash Holdings/Assets                     0.188      0.075      0.968
Earned Equity                            0.928      0.613     15.977
Asset Growth                             0.146      0.067      0.646
Firm Age                                25.418     22.000     15.030

Firm Performance
ROA                                      0.132      0.127      0.103
ROA--Five years Average                  0.137      0.132      0.089
ROA--Five years Std Deviation            0.036      0.025      0.041
Stock Return                             0.119      0.079      0.476
CEO
CEO Tenure                               7.824      5.000      7.822
CEO Age                                 56.229     56.000      7.235
CEO Total Compensation (thousands)       4,794      2,534     10,151
CEO Total Compensation Inflation         4,616      2,368     10,668
  Adjusted (thousands)
Log (CEO Total Compensation              7.802      7.771      1.196
  Inflation Adjusted)
CEO Ownership                            0.032      0.031      0.030
CEO Dollar Sensitivity (hundred          1,362        240     12,272
  thousands)
M&A
GIM                                      9.298      9.000      2.726
Staggered Board                          0.553      1.000      0.497

Panel B. Firm Summary by Tenure

                         PROP-G15   PROP-G12   PROP-G9   PROP-L5

All Outside Directors     0.142      0.225      0.352     0.388
Compensation committee    0.171      0.262      0.395     0.336
Audit committee           0.141      0.221      0.342     0.388
Nominating committee      0.175      0.273      0.410     0.322

Table III. Committee Membership

This table includes OLS regressions depicting the relation between
participation in a committee and CEO, director, and firm
characteristics. The dependent variable is an indicator that takes a
value of one if the director is a member of the audit committee,
compensation committee, or nomination committee. Observations are
included if the firm has a compensation committee, an audit
committee, or a nomination committee. The key independent variables
T1-5, T6-10, T11-15, T16-20 and T > 20 are indicator variables that
are equal to one if the director's tenure falls into the indicated
range. Age_L65 is an indicator variable that takes a value of one
when director age is less than 65. Executive is an indicator variable
that takes a value of one if the director is an executive at another
firm. Largest is an indicator variable that takes a value of one if
the directorship is the largest in terms of total assets among this
director's entire directorship portfolio, or if this is the only
directorship for the director. Retired is an indicator variable that
takes a value of one if the primary title of the director has ever
contained "Retired" in the past or in the current year. Financial
Service is an indicator variable that takes a value of one if the
primary title of the director has ever contained "Financial Service"
in the past or in the current year. Board Size is the log of the
total number of directors. %Independent is the number of independent
directors divided by the total number of directors. A busy director
serves on the board of three or more firms. Busy Board is an
indicator set to one if half or more of the independent directors are
busy directors. CEO Ownership is the total number of shares and
options that can be exercised within 60 days of the fiscal year-end
divided by the shares outstanding. Firm Size is the log of total
assets. Firm Age is the number of years the firm has been listed.
Tobin's q is (Assets -Book Equity + Market Equity)/Assets. R&D is
research and development expenses divided by assets. Standard errors
are robust and clustered by firm. The p-values are in parentheses.

                                     Committee Member

                        (1)          (2)          (3)          (4)

T1-5                 -0.048 ***
                     (0.000)
T6-10                              0.041
                                  (0.693)
T11-15                                          0.012 ***
                                               (0.000)
T16-20                                                      0.034 ***
                                                            (0.000)
T > 20

Tenure

Age_L65              -0.034 ***   -0.047 ***   -0.047 ***   -0.046 ***
                     (0.000)      (0.000)      (0.000)      (0.000)
Female Director       0.036 ***    0.034 ***    0.035 ***    0.035 ***
                     (0.000)      (0.000)      (0.000)      (0.000)
Busy Director         0.023 ***    0.023 ***    0.024 ***    0.024 ***
                     (0.000)      (0.000)      (0.000)      (0.000)
Executive             0.004       -0.000       -0.001       -0.001
                     (0.408)      (0.985)      (0.788)      (0.835)
Largest               0.018 ***    0.016 ***    0.017 ***    0.017 ***
                     (0.000)      (0.000)      (0.000)      (0.000)
Retired              -0.002       -0.003       -0.002       -0.002
                     (0.463)      (0.374)      (0.456)      (0.520)
Financial Service     0.014 ***    0.018 ***    0.018 ***    0.017 ***
                     (0.001)      (0.000)      (0.000)      (0.000)
Board Size           -0.175 ***   -0.178 ***   -0.181 ***   -0.182 ***
                     (0.000)      (0.000)      (0.000)      (0.000)
% Independent        -0.272 ***   -0.277 ***   -0.279 ***   -0.280 ***
                     (0.000)      (0.000)      (0.000)      (0.000)
CEO-Chairman         -0.037 ***   -0.034 ***   -0.035 ***   -0.034 ***
                     (0.000)      (0.000)      (0.000)      (0.000)
CEO Age               0.064 *      0.063 *      0.063 *      0.064 *
                     (0.075)      (0.082)      (0.085)      (0.076)
CEO Tenure           -0.015       -0.014       -0.014       -0.015
                     (0.670)      (0.692)      (0.703)      (0.671)
CEO Ownership        -0.133 ***   -0.134 ***   -0.130 ***   -0.132 ***
                     (0.000)      (0.000)      (0.000)      (0.000)
Firm Size             0.013 ***    0.014 ***    0.014 ***    0.013 ***
                     (0.000)      (0.000)      (0.000)      (0.000)
Firm Age              0.005 ***    0.005 ***    0.005 ***    0.005 ***
                     (0.000)      (0.000)      (0.000)      (0.000)
Tobin's q             0.000        0.000        0.000        0.000
                     (0.865)      (0.841)      (0.951)      (0.970)
R&D                   0.071        0.074        0.068        0.065
                     (0.191)      (0.171)      (0.212)      (0.229)
Observations         126,207      126,207      126,207      126,207
Adjusted [R.sup.2]    0.112        0.111        0.109        0.109
Fixed-effects                          Firm, Year

                               Committee Member

                        (5)          (6)          (7)

T1-5                              -0.055 ***
                                  (0.000)
T6-10

T11-15                             0.016
                                  (0.199)
T16-20                             0.023 ***
                                  (0.000)
T > 20               -0.030 ***   -0.051 ***
                     (0.000)      (0.000)
Tenure                                          0.002 ***
                                               (0.000)
Age_L65              -0.051 ***   -0.038 ***   -0.035 ***
                     (0.000)      (0.000)      (0.000)
Female Director       0.034 ***    0.035 ***    0.036 ***
                     (0.000)      (0.000)      (0.000)
Busy Director         0.023 ***    0.023 ***    0.024 ***
                     (0.000)      (0.000)      (0.000)
Executive            -0.002        0.003        0.002
                     (0.613)      (0.506)      (0.644)
Largest               0.016 ***    0.017 ***    0.019 ***
                     (0.000)      (0.000)      (0.000)
Retired              -0.002       -0.002       -0.002
                     (0.451)      (0.467)      (0.493)
Financial Service     0.019 ***    0.015 ***    0.015 ***
                     (0.000)      (0.000)      (0.000)
Board Size           -0.182 ***   -0.174 ***   -0.179 ***
                     (0.000)      (0.000)      (0.000)
% Independent        -0.279 ***   -0.270 ***   -0.279 ***
                     (0.000)      (0.000)      (0.000)
CEO-Chairman         -0.034 ***   -0.035 ***   -0.037 ***
                     (0.000)      (0.000)      (0.000)
CEO Age               0.062 *      0.063 *      0.065 *
                     (0.089)      (0.080)      (0.070)
CEO Tenure           -0.013       -0.014       -0.016
                     (0.719)      (0.692)      (0.643)
CEO Ownership        -0.132 ***   -0.135 ***   -0.129 ***
                     (0.000)      (0.000)      (0.000)
Firm Size             0.014 ***    0.013 ***    0.013 ***
                     (0.000)      (0.000)      (0.000)
Firm Age              0.005 ***    0.005 ***    0.006 ***
                     (0.000)      (0.000)      (0.000)
Tobin's q             0.000        0.000        0.000
                     (0.960)      (0.871)      (0.925)
R&D                   0.069        0.074        0.064
                     (0.203)      (0.175)      (0.238)
Observations         126,207      126,207      126,207
Adjusted [R.sup.2]    0.109        0.113        0.111
Fixed-effects                    Firm, Year

*** Significant at the 0.01 level.

** Significant at the 0.05 level.

* Significant at the 0.10 level.

Table IV. Attendace Problems

This table reports the relationship between attendance problems and
director, firm, and CEO characteristics. The dependent variable is an
indicator that takes a value of one if the director has not attended
75% of board meetings. The key independent variables T1-5, T6-10,
T11-15, T16-20, and T > 20 are indicator variables that are equal to
one if a director's tenure falls into the indicated range. Age_L65 is
an indicator variable that takes a value of one when director age is
less than 65. Executive is an indicator variable that takes a value
of one if the director is an executive at another firm. Largest is an
indicator variable that takes a value of one if the directorship is
the largest in terms of total assets among this director's entire
directorship portfolio, or if this is the only directorship for the
director. Retired is an indicator variable that takes a value of one
if the primary title of the director has ever contained "Retired" in
the past or in the current year. Financial Service is an indicator
variable that takes a value of one if the primary title of the
director has ever contained "Financial Service" in the past or in
the current year. Board Size is the log of the total number of
directors. %Independent is the number of independent directors
divided by the total number of directors. A busy director serves on
the board of three or more firms. Busy Board is an indicator set to
one if half or more of the independent directors are busy directors.
CEO Ownership is the total number of shares and options that can be
exercised within 60 days of fiscal year-end divided by the shares
outstanding. Firm Size is the log of total assets. Firm Age is the
number of years the firm has been listed. Tobin's q is (Assets - Book
Equity + Market Equity)/Assets. R&D is research and development
expenses divided by assets. All coefficients in this table are
multiplied by 10 to make the economic effects readable. Standard
errors are robust and clustered by firm. The p-values are in
parentheses.

                                      Poor Attendance

                        (1)          (2)          (3)          (4)

T-5                   0.061 ***
                     (0.000)
T6-10                             -0.028 **
                                  (0.026)
T11-15                                         -0.021
                                               (0.236)
T16-20                                                      -0.054 ***
                                                            (0.009)
T > 20

Tenure

Age_L65               0.008        0.024 *      0.023        0.021
                     (0.580)      (0.090)      (0.115)      (0.144)
Female Director      -0.024       -0.021       -0.022       -0.023
                     (0.187)      (0.243)      (0.222)      (0.211)
Busy Director         0.075 ***    0.075 ***    0.075 ***    0.075 ***
                     (0.003)      (0.003)      (0.003)      (0.003)
Executive             0.060 **     0.066 **     0.067 ***    0.067 **
                     (0.020)      (0.010)      (0.010)      (0.010)
Largest              -0.018       -0.020       -0.019       -0.019
                     (0.313)      (0.259)      (0.280)      (0.298)
Retired               0.004        0.006        0.005        0.005
                     (0.954)      (0.929)      (0.938)      (0.942)
Financial Service    -0.047       -0.053       -0.053       -0.052
                     (0.440)      (0.386)      (0.392)      (0.400)
Board Size            0.149 ***    0.155 ***    0.158 ***    0.158 ***
                     (0.004)      (0.003)      (0.002)      (0.002)
% Independent         0.301 **     0.304 ***    0.307 ***    0.309 ***
                     (0.010)      (0.009)      (0.008)      (0.008)
CEO-Chairman          0.074 ***    0.070 **     0.070 **     0.070 **
                     (0.007)      (0.011)      (0.011)      (0.011)
CEO Age              -0.930       -0.896       -0.871       -0.883
                     (0.599)      (0.613)      (0.622)      (0.618)
CEO Tenure            3.042        2.903        2.849        2.850
                     (0.101)      (0.117)      (0.124)      (0.124)
CEO Ownership        -0.089       -0.080       -0.084       -0.076
                     (0.600)      (0.635)      (0.619)      (0.654)
Firm Size            -0.048 *     -0.048 *     -0.048 *     -0.048 *
                     (0.052)      (0.052)      (0.055)      (0.056)
Firm Age             -0.033 ***   -0.034 ***   -0.035 ***   -0.035 ***
                     (0.000)      (0.000)      (0.000)      (0.000)
Tobin's q            -0.003       -0.003       -0.003       -0.003
                     (0.364)      (0.368)      (0.387)      (0.389)
R&D                  -0.262       -0.260       -0.259       -0.256
                     (0.325)      (0.327)      (0.330)      (0.336)
Director Meeting     -0.026 **    -0.027 **    -0.027 **    -0.027 **
  Fee                (0.015)      (0.014)      (0.014)      (0.013)
Number of meetings    2.642        2.682        2.671        2.678
                     (0.262)      (0.255)      (0.257)      (0.255)
Observations         65,938       65,938       65,938       65,938
Adjusted [R.sup.2]    0.040        0.040        0.040        0.040
Fixed-effects                          Firm, Year

                               Poor Attendance

                        (5)          (6)          (7)

T-5                                0.057 ***
                                  (0.000)
T6-10

T11-15                            -0.003
                                  (0.885)
T16-20                            -0.036 *
                                  (0.091)
T > 20               -0.015       -0.003
                     (0.589)      (0.923)
Tenure                                         -0.002 *
                                               (0.073)
Age_L65               0.023        0.007        0.015
                     (0.107)      (0.655)      (0.317)
Female Director      -0.022       -0.025       -0.024
                     (0.224)      (0.177)      (0.194)
Busy Director         0.075 ***    0.075 ***    0.075 ***
                     (0.003)      (0.003)      (0.003)
Executive             0.067 ***    0.060 **     0.065 **
                     (0.009)      (0.021)      (0.013)
Largest              -0.019       -0.018       -0.017
                     (0.290)      (0.329)      (0.330)
Retired               0.006        0.004        0.004
                     (0.935)      (0.958)      (0.949)
Financial Service    -0.053       -0.047       -0.050
                     (0.390)      (0.447)      (0.414)
Board Size            0.159 ***    0.149 ***    0.156 ***
                     (0.002)      (0.004)      (0.002)
% Independent         0.310 ***    0.302 ***    0.310 ***
                     (0.008)      (0.010)      (0.008)
CEO-Chairman          0.070 **     0.074 ***    0.072 ***
                     (0.011)      (0.007)      (0.009)
CEO Age              -0.866       -0.935       -0.876
                     (0.624)      (0.597)      (0.621)
CEO Tenure            2.826        3.039        2.860
                     (0.127)      (0.101)      (0.123)
CEO Ownership        -0.082       -0.086       -0.084
                     (0.629)      (0.614)      (0.621)
Firm Size            -0.048 *     -0.048 *     -0.047 *
                     (0.055)      (0.053)      (0.057)
Firm Age             -0.035 ***   -0.033 ***   -0.034 ***
                     (0.000)      (0.000)      (0.000)
Tobin's q            -0.003       -0.003       -0.003
                     (0.385)      (0.369)      (0.387)
R&D                  -0.257       -0.260       -0.255
                     (0.333)      (0.328)      (0.337)
Director Meeting     -0.027 **    -0.027 **    -0.027 **
  Fee                (0.014)      (0.015)      (0.014)
Number of meetings    2.667        2.645        2.656
                     (0.257)      (0.261)      (0.259)
Observations         65,938       65,938       65,938
Adjusted [R.sup.2]    0.040        0.040        0.040
Fixed-effects                    Firm, Year

*** Significant at the 0.01 level.

** Significant at the 0.05 level.

* Significant at the 0.10 level.

Table V. Determinants Analysis

This table presents the relation between becoming/having an
experienced director and director, firm, and board characteristics.
The analysis in Panel A is at firm level. PROP-G15 is the number of
independent directors with more than 15 years of tenure on the board
divided by the total number of independent directors. PROP-CC-G15 is
the proportion of directors on the compensation committee with a
tenure greater than 15 years divided by the total number of committee
members. PROP-AC-G15 is the proportion of directors on the audit
committee with a tenure greater than 15 years divided by the total
number of committee members. The first three columns use the Tobit
procedure, while the next three use OLS. Panel B indicates the
director level Cox Proportional Hazards analysis modeling the time as
a director until departure as a function of various characteristics.
Age_L65 is an indicator variable that takes a value of one when
director age is less than 65. Executive is an indicator variable that
takes a value of one if the director is an executive at another firm.
Largest is an indicator variable that takes a value of one if the
directorship is the largest in terms of total assets among this
director's entire directorship portfolio, or if this is the only
directorship for the director. Retired is an indicator variable that
takes a value of one if the primary title of the director has ever
contained "Retired" in the past or in the current year. Financial
Service is an indicator variable that takes a value of one if the
primary title of the director has ever contained "Financial Service"
in the past or in the current year. Board Size is the log of the
total number of directors. %Independent is the number of independent
directors divided by the total number of directors. A busy director
serves on the board of three or more firms. Busy Board is an
indicator set to one if half or more of the independent directors are
busy directors. CEO Ownership is the total number of shares and
options that can be exercised within 60 days of fiscal year-end
divided by the shares outstanding. Firm Size is the log of total
assets. Firm Age is the number of years the firm has been listed.
Tobin's q is (Assets - Book Equity + Market Equity)/Assets. R&D is
research and development expenses divided by assets. ROA is EBITDA
divided by the previous year-end assets. Standard deviation of ROA is
calculated over five years. Industry Volatility and Industry Return
are computed over the past three years. Standard errors are robust
and clustered by firm. The p-values are in parentheses.

Panel A. Firm-Level Proportion of Experienced Directors

                         PROP-         PROP-          PROP-
                          G15          CC-G15        AC-G15

                          (1)           (2)            (3)

Board Size             0.069 ***     0.088 ***      0.033
                      (0.000)       (0.000)        (0.107)
% Independent         -0.129 ***    -0.174 ***     -0.171 ***
                      (0.000)       (0.000)        (0.000)
CEO-Chairman          -0.002         0.014          0.003
                      (0.748)       (0.119)        (0.760)
CEO Age                0.072 ***     0.038          0.155 ***
                      (0.006)       (0.463)        (0.006)
CEO Tenure             0.070 ***     0.116 ***      0.129 ***
                      (0.000)       (0.007)        (0.000)
CEO Ownership          0.019        -0.047          0.081
                      (0.714)       (0.413)        (0.152)
Firm Size             -0.022 ***    -0.034 ***     -0.029 ***
                      (0.000)       (0.000)        (0.000)
Firm Age               0.004 ***     0.006 ***      0.005 ***
                      (0.000)       (0.000)        (0.000)
Tobin's q              0.006 **      0.006         -0.006
                      (0.024)       (0.152)        (0.141)
R&D                    0.072         0.133          0.182
                      (0.318)       (0.302)        (0.115)
Std Deviation (ROA)   -0.348 ***    -0.606 ***     -0.336 ***
                      (0.000)       (0.000)        (0.008)
Five-Year Avg ROA      0.063 *       0.015          0.148 **
                      (0.079)       (0.815)        (0.014)
Observations          16,495        16,291         16,423
Pseudo [R.sup.2]       0.093         0.043          0.037
Adjusted [R.sup.2]
Fixed-effects          Industry,     Industry,      Industry,
                         Year           Year          Year

                         PROP-        PROP-       PROP-
                          G15        CC-G15       AC-G15

                          (4)          (5)         (6)

Board Size            -0.021 **      0.014       0.011
                      (0.026)       (0.248)     (0.382)
% Independent         -0.053 ***     0.006       0.022
                      (0.000)       (0.750)     (0.183)
CEO-Chairman           0.002        -0.000       0.005
                      (0.604)       (0.960)     (0.261)
CEO Age                0.047 ***     0.004       0.072 ***
                      (0.009)       (0.895)     (0.000)
CEO Tenure            -0.034        -0.047      -0.016
                      (0.174)       (0.162)     (0.544)
CEO Ownership          0.030        -0.042       0.094 **
                      (0.362)       (0.320)     (0.014)
Firm Size              0.012 ***     0.007       0.015 ***
                      (0.003)       (0.214)     (0.003)
Firm Age               0.003 ***     0.002 **    0.001
                      (0.000)       (0.011)     (0.347)
Tobin's q             -0.000         0.001      -0.003
                      (0.913)       (0.655)     (0.104)
R&D                    0.030         0.067       0.022
                      (0.628)       (0.380)     (0.761)
Std Deviation (ROA)    0.107 **      0.065       0.085
                      (0.025)       (0.303)     (0.163)
Five-Year Avg ROA     -0.062 **     -0.051      -0.034
                      (0.035)       (0.196)     (0.382)
Observations          16,557        16,353      16,484
Pseudo [R.sup.2]
Adjusted [R.sup.2]     0.578         0.488       0.475
Fixed-effects            Firm,        Firm,       Firm,
                         Year         Year         Year

Panel B. Cox Proportional Hazards Analysis

                               Event: Director Turnover

                    (1)           (2)            (3)           (4)

Age_L65           0.921 ***      0.945 *       0.948 *       0.952
                 (0.008)        (0.066)       (0.086)       (0.110)
Female            1.227 ***      1.171 ***     1.210 ***     1.151 ***
  Director       (0.000)        (0.001)       (0.000)       (0.003)
Busy Director     1.105 **       0.995         0.994         1.011
                 (0.023)        (0.913)       (0.896)       (0.804)
Executive         1.332 ***      1.262 ***     1.255 ***     1.225 ***
                 (0.000)        (0.000)       (0.000)       (0.001)
Largest           0.923 *        0.916 **      0.893 ***     0.876 ***
                 (0.050)        (0.034)       (0.006)       (0.001)
Retired           1.381 ***      1.303 ***     1.311 ***     1.183 ***
                 (0.000)        (0.000)       (0.000)       (0.006)
Financial         0.992          0.960         0.973         0.654 ***
  Service        (0.914)        (0.566)       (0.704)       (0.000)
CEO-Chairman                     1.619 ***     1.686 ***     1.707 ***
                                (0.000)       (0.000)       (0.000)
CEO Age                          4.133 **      2.817         2.878
                                (0.049)       (0.256)       (0.145)
CEO Tenure                       0.984 ***     0.982 ***     0.981 ***
                                (0.000)       (0.000)       (0.000)
CEO Ownership                    0.612         0.576         0.683
                                (0.261)       (0.197)       (0.365)
Board Size                       1.196 *       1.051         1.048
                                (0.069)       (0.587)       (0.610)
%Independent                     3.260 ***     3.090 ***     2.869 ***
                                (0.000)       (0.000)       (0.000)
Firm Size                        1.153 ***     1.112 ***     1.111 ***
                                (0.000)       (0.000)       (0.000)
Firm Age                         0.986 ***     0.990 ***     0.990 ***
                                (0.000)       (0.000)       (0.000)
Tobin's q                        0.970 *       0.987         0.982
                                (0.085)       (0.411)       (0.267)
R&D                              4.378 ***     3.877 ***     3.975 ***
                                (0.001)       (0.000)       (0.000)
Industry                                       1.008 **      0.997
  Volatility                                  (0.038)       (0.331)
Industry                                       0.985         1.070
  Return                                      (0.425)       (0.160)
Post-Sox                                                     0.676 ***
                                                            (0.000)
[Chi.sup.2]     700.971       1041.352       839.454       663.821
Observations    120,334       120,334        120,596       120,596
Fixed-effects    Industry,     Industry,        Year
                   Year           Year

*** Significant at the 0.01 level.

** Significant at the 0.05 level.

* Significant at the 0.10 level.

Table VI. CEO Compensation

This table includes OLS regressions indicating the relationship
between the log of CEO compensation and director and firm
characteristics. Column (2) includes observations where the CEO
tenure is greater or equal to that of all independent directors.
Column (3) does not treat independent directors as experienced if
they are hired by the current CEO. The dependent variable for all
regressions is the log of CEO total compensation, which is the sum of
salary, bonus, equity, and long-term incentive pay. PROP-G15-CC is
the number of directors with tenure greater than 15 years divided by
the total number of directors on the compensation committee. Stock
Return is the firm stock return for the previous year minus the CRSP
value-weighted market index. %Independent is the number of
independent directors divided by the total number of directors. A
busy director serves on the board of three or more other firms. Busy
Board is an indicator set to one if half or more of the independent
directors are busy directors. Mean Dir Age is the mean age of all
independent directors. % CEO-Hire is the number of directors hired
after the CEO on the compensation committee divided by the total
number of independent directors. Board Size is the log of the total
number of directors. %Independent is the number of independent
directors divided by the total number of directors. CEO Ownership is
the total number of shares and options that can be exercised within
60 days of the fiscal year-end divided by the shares outstanding.
Firm Size is the log of total assets. Firm Age is the number of years
the firm has been listed. Tobin's q is (Assets--Book Equity + Market
Equity)/Assets. R&D is research and development expenses divided by
assets. ROA is EBITDA divided by the previous year-end assets.
Standard deviation of ROA is calculated over five years. Standard
errors are robust and clustered by firm where industry and firm
fixed-effects are used and clustered by director when director
fixed-effects are used. The p-values are in parentheses.

Log (CEO Compensation)

                        (1)          (2)          (3)          (4)

PROP-G15-CC          -0.095 **    -0.770 *     -0.174 **    -0.100 **
                     (0.020)      (0.072)      (0.014)      (0.020)
Board Size            0.055        0.028        0.018        0.169
                     (0.442)      (0.892)      (0.823)      (0.121)
% Independent         0.226 **     0.009        0.241 **     0.493 ***
                     (0.028)      (0.985)      (0.024)      (0.000)
Busy Board            0.029       -0.065        0.041        0.048
                     (0.598)      (0.724)      (0.456)      (0.343)
Mean Dir Age          0.003        0.014       -0.002        0.004
                     (0.507)      (0.357)      (0.618)      (0.312)
% CEO-Hire            0.004                     0.007        0.004
                     (0.586)                   (0.410)      (0.781)
CEO-Chairman          0.068 ***    0.043        0.067 **     0.180 ***
                     (0.006)      (0.640)      (0.013)      (0.000)
CEO Age               0.064       -0.237       -0.086       -0.478
                     (0.734)      (0.164)      (0.603)      (0.486)
CEO Tenure           -0.536        0.278        0.149       -0.380
                     (0.329)      (0.151)      (0.493)      (0.181)
CEO Ownership        -0.714 *     -0.990 **    -0.781 *     -1.586 **
                     (0.078)      (0.029)      (0.068)      (0.011)
One Year Stock        0.153 ***    0.113        0.149 ***    0.188 ***
  Return             (0.000)      (0.119)      (0.000)      (0.000)
Volatility            0.054       -0.063        0.043        0.017
                     (0.136)      (0.672)      (0.262)      (0.615)
Firm Size             0.227 ***    0.298 **     0.240 ***    0.372 ***
                     (0.000)      (0.013)      (0.000)      (0.000)
Firm Age             -0.036 ***   -0.048 ***   -0.033 ***    0.002
                     (0.000)      (0.002)      (0.000)      (0.168)
R&D                   0.378       -0.168        0.664        1.653 ***
                     (0.424)      (0.889)      (0.192)      (0.000)
Observations         16,622       2,581        16,622       16,560
Adjusted [R.sup.2]    0.673        0.536        0.609        0.369
Fixed-effects        Firm,        Firm,        Firm,        Industry,
                     Year         Year         Year         Year

Log (CEO Compensation)

                       (5)

G15 *CC              -0.036 *
                     (0.085)
Board Size            0.088 ***
                     (0.008)
%Outside              0.153 **
                     (0.032)
Busy Director         0.015
                     (0.328)
Director Age         -0.012 **
                     (0.021)
CEO-Hire             -0.018
                     (0.172)
G15                   0.005
                     (0.777)
CC                   -0.012
                     (0.276)
CEO-Chairman          0.020
                     (0.194)
CEO Age               0.780 *
                     (0.084)
CEO Tenure           -0.504 ***
                     (0.000)
CEO Ownership        -0.450 ***
                     (0.004)
One Year Stock        0.145 ***
  Return             (0.000)
Volatility            0.120 ***
                     (0.000)
Firm Size             0.316 ***
                     (0.000)
Firm Age             -0.000
                     (0.758)
R&D                   1.474 ***
                     (0.000)
Observations         94,012
Adjusted [R.sup.2]    0.593
Fixed-effects        Director,
                       Year

*** Significant at the 0.01 level.

** Significant at the 0.05 level.

* Significant at the 0.10 level.

Table VII. CEO Turnover

This table includes regressions demonstrating the relationship
between CEO turnover and firm, CEO, and board characteristics. Column
(2) includes observations where the CEO tenure is greater than or
equal to that of all independent directors. Column (3) does not treat
independent directors as experienced if they are hired by the current
CEO. The dependent variable is an indicator that takes a value of one
if the CEO is in his last year, except in the case of death and
retirement. PROP-GJ5 is the number of directors with tenure greater
than 15 years divided by the total number of independent directors.
Stock Return is the firm stock return for the previous year minus the
CRSP value-weighted market index for the previous year. % CEO-Hire is
the number of independent directors hired after the CEO divided by
the total number of directors. Board Size is the log of the total
number of directors. % Independent is the number of independent
directors divided by the total number of directors. A busy director
serves on the board of three or more firms. Busy Board is an
indicator set to one if half or more of the independent directors are
busy directors. CEO Ownership is the total number of shares and
options that can be exercised within 60 days of the fiscal year-end
divided by the shares outstanding. Firm Size is the log of total
assets. Firm Age is the number of years the firm has been listed.
Tobin's q is (Assets - Book Equity + Market Equity)/Assets. R&D is
research and development expenses divided by assets. Standard errors
are robust and clustered by firm where industry and firm fixed-
effects are used and clustered by director when director fixed-
effects are used. The p-values are in parentheses.

                                    CEO Turnover

                       (1)        (2)          (3)          (4)

PROP-G15*Ret       -0.079 **   -0.066 *     -0.108 ***   -0.079 **
                   (0.022)     (0.086)      (0.006)      (0.012)
% CEO-Hire*Ret      0.030 *                  0.022        0.028
                   (0.098)                  (0.232)      (0.107)
Board Size         -0.031       0.082 **    -0.031        0.026 *
                   (0.304)     (0.012)      (0.298)      (0.062)
%Independent       -0.101 ***   0.108 **    -0.104 ***    0.024
                   (0.007)     (0.047)      (0.006)      (0.254)
Busy Board          0.067 ***   0.051        0.068 ***    0.050 ***
                   (0.004)     (0.384)      (0.004)      (0.007)
Mean Dir Age        0.003 **   -0.001        0.004 **    -0.001
                   (0.040)     (0.494)      (0.010)      (0.352)
% CEO-Hire          0.339 ***                0.339 ***    0.146 ***
                   (0.000)                  (0.000)      (0.000)
PROP-G15            0.107 ***   0.066 *      0.073 **     0.016
                   (0.000)     (0.096)      (0.012)      (0.300)
CEO-Chairman       -0.233 ***  -0.315 ***   -0.232 ***   -0.141 ***
                   (0.000)     (0.000)      (0.000)      (0.000)
CEO Age             0.077       0.060        0.080        0.091
                   (0.355)     (0.240)      (0.342)      (0.119)
CEO Tenure          0.118 ***  -0.033        0.126 ***    0.022
                   (0.000)     (0.145)      (0.000)      (0.207)
CEO Ownership       0.129      -0.086        0.137       -0.114 **
                   (0.213)     (0.313)      (0.189)      (0.011)
Stock Return       -0.021 *     0.027 *     -0.016       -0.023 **
                   (0.056)     (0.077)      (0.160)      (0.013)
Firm Size           0.028 ***   0.004        0.028 ***    0.006 **
                   (0.009)     (0.635)      (0.009)      (0.012)
R&D                 0.197      -0.103        0.190        0.010
                   (0.271)     (0.557)      (0.294)      (0.889)
Tobin's q          -0.003       0.002       -0.004       -0.006 **
                   (0.428)     (0.718)      (0.375)      (0.014)
Firm Age            0.004 ***   0.001        0.004 ***    0.001 ***
                   (0.005)     (0.110)      (0.006)      (0.000)
Observations       14,539      2,266        14,539       14,487
Adjusted            0.104       0.190        0.103        0.066
  [R.sup.2]
Fixed-effects         Firm,    Industry,      Firm,      Industry,
                       Year       Year         Year         Year

                   CEO Turnover

                       (5)

G15*Ret            -0.021 ***
                   (0.006)
CEO-Hire*Ret        0.012 **
                   (0.027)
Board Size          0.041 ***
                   (0.000)
%Independent       -0.174 ***
                   (0.000)
Busy Director      -0.001
                   (0.847)
Director Age       -0.003
                   (0.165)
CEO-Hire            0.191 ***
                   (0.000)
Tenure [greater     0.024 ***
  than or equal    (0.000)
  to] 15
CEO-Chairman       -0.063 ***
                   (0.000)
CEO Age             0.254 ***
                   (0.000)
CEO Tenure         -0.123 **
                   (0.031)
CEO Ownership      -0.056
                   (0.164)
Stock Return       -0.025 ***
                   (0.000)
Firm Size           0.000
                   (0.965)
R&D                 0.175 ***
                   (0.005)
Tobin*s q          -0.001
                   (0.482)
Firm Age            0.001 ***
                   (0.000)
Observations       81,755
Adjusted            0.043
  [R.sup.2]
Fixed-effects       Director,
                       Year

*** Significant at the 0.01 level.

** Significant at the 0.05 level.

* Significant at the 0.10 level.

Table VIII. Financial Restatements

This table includes logit regressions illustrating the relationship
between the likelihood of a firm making an earnings restatement and
director and firm characteristics from 1998 to 2006. The dependent
variable Rest is an indicator that takes a value of one if firm makes
an earnings restatement. The dependent variable Irrg is an indicator
that takes a value of one if a firm intentionally misreports its
earnings. Columns (3) and (4) only use observations where CEO tenure
is greater than that of all of the independent directors. Columns (5)
and (6) do not treat independent directors as experienced if they are
hired by the current CEO. PROP-AC-GI5 is the number of directors with
tenure greater than 15 years on the audit committee, divided by the
total number of directors on the audit committee. % CEO-Hire is the
number of directors hired after the CEO on the audit committee
divided by the total number of independent directors. Board Size is
the log of the total number of directors. %Independent is the number
of independent directors divided by the total number of directors. A
busy director serves on the board of three or more firms. Busy Board
is an indicator set to one if half or more of the independent
directors are busy directors. CEO Ownership is the total number of
shares and options that can be exercised within 60 days of the fiscal
year-end divided by the shares outstanding. Firm Size is the log of
total assets. Firm Age is the number of years the firm has been
listed. Tobin's q is (Assets - Book Equity + Market Equity)/Assets.
R&D is research and development expenses divided by assets. Standard
errors are robust and clustered by firm. The p-values are in
parentheses.

                     Rest.         Irrg.          Rest.

                      (1)           (2)            (3)

PROP-AC-G15         -0.199       -1.356 **     -0.229
                    (0.542)      (0.030)       (0.719)
Board Size           0.016       -0.196        -0.003
                    (0.952)      (0.646)       (0.992)
%Independent        -0.090       -0.969 *       0.463
                    (0.803)      (0.078)       (0.478)
Busy Board          -0.006        0.168         0.425
                    (0.984)      (0.624)       (0.401)
Mean Dir Age         0.001       -0.016         0.018
                    (0.920)      (0.497)       (0.379)
% CEO-Hire           0.063        0.052
                    (0.741)      (0.865)
CEO-Chairman         0.039        0.111         0.261
                    (0.749)      (0.562)       (0.322)
CEO Age            -16.180 *    -35.464 **    -18.619
                    (0.073)      (0.024)       (0.313)
CEO Tenure           6.073       29.501         9.168
                    (0.575)      (0.116)       (0.516)
CEO Ownership        0.522       -5.148 **     -0.295
                    (0.589)      (0.036)       (0.826)
Firm Size            0.123 **     0.296 ***     0.194 *
                    (0.014)      (0.000)       (0.057)
Firm Age             0.001       -0.000        -0.006
                    (0.897)      (0.992)       (0.582)
Tobin's q           -0.014        0.003        -0.017
                    (0.787)      (0.960)       (0.889)
R&D                 -0.491       -1.393         0.936
                    (0.674)      (0.308)       (0.582)
Observations        10,344        9,157         1,915
Pseudo [R.sup.2]     0.053        0.098         0.113
Fixed-effects                 Industry, Year

                     Irrg.        Rest.         Irrg.

                      (4)          (5)           (6)

PROP-AC-G15         -3.260 **    -0.298       -1.339 *
                    (0.044)      (0.381)      (0.098)
Board Size           0.361        0.230       -0.083
                    (0.660)      (0.419)      (0.895)
%Independent         0.165        0.128       -0.656
                    (0.881)      (0.753)      (0.392)
Busy Board           1.059        0.005        0.124
                    (0.126)      (0.985)      (0.792)
Mean Dir Age         0.021        0.017       -0.004
                    (0.682)      (0.231)      (0.898)
% CEO-Hire                        0.133       -0.049
                                 (0.533)      (0.912)
CEO-Chairman         0.571       -0.012        0.130
                    (0.263)      (0.929)      (0.678)
CEO Age            -59.525      -14.073      -34.681
                    (0.250)      (0.156)      (0.133)
CEO Tenure          47.235        3.618       40.417 *
                    (0.116)      (0.739)      (0.066)
CEO Ownership       -8.964 *      0.464      -11.955 **
                    (0.082)      (0.672)      (0.034)
Firm Size            0.169        0.128 **     0.329 ***
                    (0.453)      (0.021)      (0.003)
Firm Age             0.032 *     -0.001       -0.003
                    (0.073)      (0.798)      (0.776)
Tobin's q           -0.193       -0.169 **    -0.283
                    (0.549)      (0.033)      (0.174)
R&D                  1.272       -0.008        0.869
                    (0.603)      (0.996)      (0.643)
Observations         1,251       10,344        9,157
Pseudo [R.sup.2]     0.161        0.059        0.114
Fixed-effects                Industry, Year

*** Significant at the 0.01 level.

** Significant at the 0.05 level.

* Significant at the 0.10 level.

Table IX. Acquisition Decision

This table illustrates the relationship between the likelihood of a
firm making an acquisition and director and firm characteristics.
Column (2) includes observations where the CEO tenure is greater than
or equal to that of all independent directors. Column (3) does not
treat independent directors as experienced if they are hired by the
current CEO. The dependent variable is an indicator that takes a
value of one if the firm makes an acquisition that year. PROP-G15 is
the number of directors with tenure greater than 15 years divided by
the total number of independent directors. % CEO-Hire is the number
of independent directors hired after the CEO divided by the total
number of directors. Board Size is the log of the total number of
directors. %Independent is the number of independent directors
divided by the total number of directors. A busy director serves on
the board of three or more firms. Busy Board is an indicator set to
one if half or more of the independent directors are busy directors.
CEO Ownership is the total number of shares and options that can be
exercised within 60 days of the fiscal year-end divided by the shares
outstanding. Firm Size is the log of total assets. Firm Age is the
number of years the firm has been listed. Tobin's q is (Assets - Book
Equity + Market Equity)/Assets. R&D is research and development
expenses divided by assets. Standard errors are robust and clustered
by firm where industry and firm fixed-effects are used and clustered
by director when director fixed-effects are used. The p-values are in
parentheses.

                                       Acquisition

                        (1)          (2)          (3)          (4)

PROP-G15            -0.046 *      -0.163 *     -0.057 **    -0.039 *
                    (0.090)       (0.061)      (0.041)      (0.066)
Board Size           0.032         0.058        0.034        0.022
                    (0.246)       (0.511)      (0.217)      (0.252)
%Independent        -0.057        -0.099       -0.057        0.004
                    (0.154)       (0.376)      (0.152)      (0.916)
Busy Board           0.006         0.102 *     -0.002        0.018
                    (0.840)       (0.073)      (0.944)      (0.416)
Mean Dir Age         0.001         0.004        0.001        0.001
                    (0.414)       (0.390)      (0.435)      (0.551)
% CEO-Hire           0.003                     -0.002        0.026 **
                    (0.846)                    (0.902)      (0.037)
CEO-Chairman        -0.008         0.040       -0.007        0.002
                    (0.437)       (0.175)      (0.464)      (0.794)
CEO Age             -0.012        -0.045       -0.013       -0.060 ***
                    (0.748)       (0.374)      (0.729)      (0.002)
CEO Tenure          -0.002         0.010       -0.011       -0.004
                    (0.906)       (0.793)      (0.549)      (0.874)
CEO Ownership        0.010        -0.194        0.010       -0.182 ***
                    (0.929)       (0.213)      (0.930)      (0.009)
Firm Size           -0.056 ***    -0.074       -0.055 ***    0.005
                    (0.000)       (0.150)      (0.000)      (0.102)
Firm Age            -0.009 ***    -0.008       -0.010 ***   -0.001 **
                    (0.000)       (0.173)      (0.000)      (0.020)
R&D                 -0.199        -1.025 *     -0.203        0.032
                    (0.389)       (0.091)      (0.359)      (0.787)
Tobin's q            0.001         0.001       -0.000       -0.010 ***
                    (0.868)       (0.933)      (0.953)      (0.003)
Free Cash Flow       0.255 ***     0.166        0.253 ***    0.079
                    (0.000)       (0.408)      (0.000)      (0.178)
Leverage            -0.203 ***    -0.427 ***   -0.211 ***   -0.041
                    (0.000)       (0.002)      (0.000)      (0.102)
Cash                -0.007         0.073       -0.006       -0.006 ***
                    (0.253)       (0.301)      (0.348)      (0.008)
Observations        15,478        2,419        15,478       15,421
Adjusted             0.172         0.185        0.216        0.048
  [R.sup.2]
Fixed-effects       Firm, Year    Firm, Year   Firm, Year   Industry,
                                                               Year

                    Acquisition

                        (5)

G15                 -0.008 *
                    (0.094)
Board Size           0.066 ***
                    (0.000)
%Outside            -0.063 ***
                    (0.004)
Busy Director       -0.010 *
                    (0.080)
Director Age         0.001
                    (0.804)
CEO-Hire            -0.003
                    (0.385)
CEO-Chairman         0.005
                    (0.361)
CEO Age             -0.063 ***
                    (0.002)
CEO Tenure           0.065 ***
                    (0.001)
CEO Ownership        0.021
                    (0.591)
Firm Size           -0.001
                    (0.697)
Firm Age            -0.001 ***
                    (0.000)
R&D                  0.212 ***
                    (0.000)
Tobin's q            0.001
                    (0.192)
Free Cash Flow       0.160 ***
                    (0.000)
Leverage            -0.164 ***
                    (0.000)
Cash                -0.002
                    (0.209)
Observations        104,168
Adjusted             0.156
  [R.sup.2]
Fixed-effects        Director,
                       Year

*** Significant at the 0.01 level.

** Significant at the 0.05 level.

* Significant at the 0.10 level.

Table X. Cumulative Abnormal Returns

This table includes regressions outlining the relationship between
cumulative abnormal returns and director and firm characteristics.
The dependent variable is the cumulative abnormal stock return for
the acquiring firm two days before and two days after the acquisition
has been announced. Columns (4) to (6) do not treat independent
directors as experienced if they are hired by the current CEO. PROP-
G15 is the number of directors with tenure greater than 15 years
divided by the total number of independent directors. GIM is the
Gompers et al. (2003) index of 24 anti take over shareholder
provisions. % CEO-Hire is the number of independent directors hired
after the CEO divided by the total number of directors. Board Size is
the log of the total number of directors. %Independent is the number
of independent directors divided by the total number of directors. A
busy director serves on the board of three or more firms. Busy Board
is an indicator set to one if half or more of the independent
directors are busy directors. CEO Ownership is the total number of
shares and options that can be exercised within 60 days of the fiscal
year-end divided by the shares outstanding. Firm Size is the log of
total assets. Firm Age is the number of years the firm has been
listed. Tobin's q is (Assets - Book Equity + Market Equity)/Assets.
R&D is research and development expenses divided by assets. Standard
errors are robust and clustered by firm. The p-values are in
parentheses.

                                  CAR (-2,2)

                        (1)          (2)          (3)

PROP-G15              1.841 ***    2.143 ***    1.815 ***
                     (0.003)      (0.003)      (0.004)
Board Size           -0.381        0.209       -0.585
                     (0.509)      (0.755)      (0.319)
% Independent        -0.617       -0.679       -0.533
                     (0.480)      (0.491)      (0.548)
Busy Board           -0.636       -0.094       -0.624
                     (0.360)      (0.897)      (0.369)
Mean Dir Age          0.006       -0.021        0.004
                     (0.836)      (0.562)      (0.898)
% CEO-Hire            0.148        0.113        0.263
                     (0.697)      (0.801)      (0.501)
CEO-Chairman          0.236        0.200        0.112
                     (0.352)      (0.519)      (0.663)
CEO Age              -0.274       -0.786       -0.287
                     (0.494)      (0.371)      (0.475)
CEO Tenure           -0.431       -0.018       -0.516
                     (0.297)      (0.971)      (0.240)
CEO Ownership         2.137        3.282        2.103
                     (0.200)      (0.175)      (0.209)
Firm Size            -0.180 *     -0.257 ***   -0.161
                     (0.074)      (0.030)      (0.116)
Firm Age             10.009       16.310       13.083
                     (0.245)      (0.135)      (0.132)
R&D                  -5.094 *     -6.880 *     -5.128 *
                     (0.084)      (0.084)      (0.084)
Tobin's q            -0.077 ***   -0.096       -0.074 ***
                     (0.011)      (0.403)      (0.016)
Free Cash Flow        0.894       -0.612        0.957
                     (0.668)      (0.826)      (0.646)
Leverage              0.185        0.081        0.245
                     (0.825)      (0.939)      (0.774)
Relative Size        -0.616       -0.515       -0.650
                     (0.180)      (0.229)      (0.164)
Diff Industries      -0.410 *     -0.223       -0.387 *
                     (0.079)      (0.448)      (0.099)
Private               2.021 ***    1.917 ***    1.989 ***
                     (0.000)      (0.000)      (0.000)
% Cash                0.009 ***    0.009 ***    0.009 ***
                     (0.001)      (0.004)      (0.000)
GINDEX                            -0.036
                                  (0.461)
Staggered Board                                 0.205
                                               (0.385)
Observations         3,599        2,464        3,510
Adjusted [R.sup.2]    0.044        0.050        0.043
Fixed-effects                   Industry, Year

                                  CAR (-2,2)

                        (4)          (5)          (6)

PROP-G15              1.748 ***    1.871 ***    1.648 ***
                     (0.007)      (0.012)      (0.010)
Board Size           -0.402        0.195       -0.605
                     (0.485)      (0.771)      (0.302)
% Independent        -0.668       -0.754       -0.590
                     (0.443)      (0.444)      (0.505)
Busy Board           -0.643       -0.106       -0.635
                     (0.355)      (0.884)      (0.362)
Mean Dir Age          0.010       -0.017        0.008
                     (0.728)      (0.641)      (0.777)
% CEO-Hire            0.221        0.183        0.330
                     (0.567)      (0.690)      (0.406)
CEO-Chairman          0.246        0.206        0.122
                     (0.331)      (0.508)      (0.636)
CEO Age              -0.276       -0.798       -0.287
                     (0.490)      (0.364)      (0.474)
CEO Tenure           -0.380       -0.006       -0.475
                     (0.293)      (0.990)      (0.220)
CEO Ownership         2.197        3.341        2.166
                     (0.192)      (0.172)      (0.200)
Firm Size            -0.182 *     -0.262 ***   -0.164
                     (0.070)      (0.027)      (0.108)
Firm Age             10.375       17.438       13.649
                     (0.229)      (0.109)      (0.117)
R&D                  -5.054 *     -6.903 *     -5.088 *
                     (0.087)      (0.084)      (0.087)
Tobin's q            -0.078 ***   -0.096       -0.075 ***
                     (0.009)      (0.406)      (0.014)
Free Cash Flow        0.909       -0.613        0.970
                     (0.662)      (0.826)      (0.642)
Leverage              0.173        0.073        0.236
                     (0.837)      (0.944)      (0.782)
Relative Size        -0.622       -0.523       -0.656
                     (0.176)      (0.223)      (0.161)
Diff Industries      -0.406 *     -0.228       -0.383
                     (0.082)      (0.439)      (0.102)
Private               2.013 ***    1.909 ***    1.982 ***
                     (0.000)      (0.000)      (0.000)
% Cash                0.009 ***    0.009 ***    0.009 ***
                     (0.001)      (0.004)      (0.000)
GINDEX                            -0.038
                                  (0.445)
Staggered Board                                 0.201
                                               (0.395)
Observations         3,599        2,464        3,510
Adjusted [R.sup.2]    0.044        0.049        0.043
Fixed-effects                   Industry, Year

*** Significant at the 0.01 level.

** Significant at the 0.05 level.

* Significant at the 0.10 level.

Table XI. Propensity Score Matched Sample

This table reports the results of repeating some of the previous
regressions based on the propensity score matched sample. The
propensity score model includes all of the explanatory variables in
Panel A of Table V. Firms are matched within the same Fama-French 48
industry group and only remain if the control firm's score does not
deviate from the treatment firm's score by 5%. The regressions in
Columns (1) to (5) are from Column (4) in Table VI, Column (4) in
Table VII, Column (2) in Table VIII, Column (4) in Table IX, and
Column (1) in Table X, respectively. PROP-GI5 is the ratio of
experienced independent directors of the board for Columns (2), (4),
and (5) of the compensation committee for Column (1), and of the
audit committee for Column (3). For brevity, control variables that
are specific to certain regressions (e.g., stock return for Turnover
and M&A characteristics for CAR) are not reported. Board Size is the
log of the total number of directors. %Independent is the number of
independent directors divided by the total number of directors. A
busy director serves on the board of three or more firms. Busy Board
is an indicator set to one if half or more of the independent
directors are busy directors. Mean Dir Age is the mean age of all
independent directors. % Hired By CEO is the ratio of CEO-hire
independent directors of the board for Columns (2), (4), and (5) of
the compensation committee for Column (1), and of the audit committee
for Column (3). The CEO-Chairman flag is set to one if the CEO is
also the Chairman of the Board. CEO %Own is the total number of
shares and options that can be exercised within 60 days of the fiscal
year-end divided by the shares outstanding. Firm Size is the log of
total assets. Firm Age is the number of years the firm has been
listed. Tobin's q is (Assets - Book Equity + Market Equity)/Assets.
R&D is research and development expenses divided by assets. Standard
errors are robust and clustered by firm. The p-values are in
parentheses.

                            Compensation    Turnover    Irregularity

                                (1)           (2)           (3)

PROP-G15                    -0.019          0.014        -0.019 *
                            (0.827)        (0.430)       (0.071)
PROP-G15*Stock Return                      -0.076 **
                                           (0.043)
Board Size                   0.238 **       0.011        -0.002
                            (0.044)        (0.483)       (0.864)
%Independent                 0.537 ***      0.011        -0.016
                            (0.000)        (0.660)       (0.233)
Busy Board                   0.014          0.043 *      -0.005
                            (0.844)        (0.051)       (0.619)
Mean Dir Age                 0.008 *       -0.000         0.000
                            (0.082)        (0.772)       (0.826)
% CEO-Hire                   0.069          0.138 ***     0.003
                            (0.314)        (0.000)       (0.638)
CEO-Chairman                 0.192 ***     -0.137 ***     0.003
                            (0.000)        (0.000)       (0.523)
CEO Age                     -2.054          0.130        -0.591
                            (0.344)        (0.353)       (0.147)
CEO Tenure                  -2.023 *        0.359 **      0.198
                            (0.071)        (0.036)       (0.494)
CEO % Ownership             -1.602 **      -0.148 ***    -0.067 ***
                            (0.017)        (0.004)       (0.000)
Firm Size                    0.355 ***      0.007 **      0.004 *
                            (0.000)        (0.012)       (0.073)
Firm Age                     0.003 **       0.001 ***     0.000
                            (0.021)        (0.001)       (0.714)
R&D                          1.250 ***      0.041        -0.001
                            (0.006)        (0.616)       (0.981)
Tobin's q                    0.082 ***     -0.008 ***    -0.002
                            (0.000)        (0.003)       (0.169)
Observations                12,601         10,860         6,427
Adjusted/Pseudo [R.sup.2]    0.363          0.063         0.011
Fixed-effects                            Industry, Year

                            Acquisition      CAR

                                (4)          (5)

PROP-G15                    -0.000          1.550 *
                            (0.991)        (0.080)
PROP-G15*Stock Return

Board Size                   0.068 ***     -1.203
                            (0.002)        (0.149)
%Independent                 0.022         -0.184
                            (0.526)        (0.866)
Busy Board                   0.020         -0.250
                            (0.405)        (0.721)
Mean Dir Age                 0.001          0.034
                            (0.413)        (0.395)
% CEO-Hire                   0.035 ***      1.088
                            (0.006)        (0.132)
CEO-Chairman                 0.004          0.209
                            (0.666)        (0.494)
CEO Age                     -0.055          0.213
                            (0.209)        (0.702)
CEO Tenure                   0.034        -14.176
                            (0.839)        (0.653)
CEO % Ownership             -0.133 *        3.020
                            (0.055)        (0.227)
Firm Size                    0.006 *       -0.090
                            (0.062)        (0.438)
Firm Age                    -0.001 **       8.329
                            (0.012)        (0.441)
R&D                          0.038         -4.621
                            (0.718)        (0.110)
Tobin's q                   -0.008 **       0.090
                            (0.019)        (0.308)
Observations                12,546          2,183
Adjusted/Pseudo [R.sup.2]     0.044         0.053
Fixed-effects                   Industry, Year

*** Significant at the 0.01 level.

** Significant at the 0.05 level.

* Significant at the 0.10 level.

Table XII. Director Fixed-Effects

This table reports results of repeating some of the previous
regressions with director-fixed-effects. Panel A implements director
x year fixed-effects and contains firms in which at least one
independent director has more than one directorship in a given year
and has a tenure of more than 12 years in at least one directorship
and a tenure of less than five years in at least one directorship.
Panel B implements director x firm fixed-effects and contains firms
which have experienced directors and whose data are available for at
least one year when the tenure of the experienced director is below
five years and when the tenure of the experienced director is over 12
years. The coefficients in Column (2) of both panels are multiplied
by 10. Control variables in Columns (1) to (6) are initially from
Column (1) in Table 111, Column (1) in Table IV, Column (4) in Table
VI, Column (4) in Table VII, Column (2) in Table VIII, and Column (4)
in Table IX, respectively. Thereafter Panel A drops Age L65, Female
Director, and Busy Director; while Panel B drops Age_L65, Female
Director, Firm Age, Director Meeting Fee, and Number of Meetings.
Standard errors are robust and clustered by firm. The p-values are in
parentheses.

Panel A. Director and Year Fixed-Effects

                        Committee      Poor          CEO
                         Member     Attendance   Compensation

                           (1)         (2)           (3)

Tenure                   0.072 *     0.051          -0.022
                        (0.074)     (0.516)         (0.267)
Tenure * Stock Return

Observations              2,809       2,465         2,432
Adjusted [R.sup.2]       0.169       0.037           0.502
Control Variables          Yes         Yes           Yes
Fixed-effects                      Director & Year

Panel B. Director and Firm Fixed-Effects

Tenure                   0.008 **   -0.011 ***      0.023
                        (0.013)     (0.000)        (0.629)
Tenure * Stock Return

Observations             13,335       15,196        11,898
Adjusted [R.sup.2]       0.270       0.066          0.265
Control Variables          Yes         Yes           Yes
Fixed-effects                      Director & Firm

Panel A. Director and Year Fixed-Effects

                           CEO        Financial     Acquisition
                         Turnover    Irregularity    Decisions

                           (4)           (5)            (6)

Tenure                   0.005        -0.001 **      0.009
                        (0.738)       (0.047)       (0.876)
Tenure * Stock Return   -0.165 ***
                        (0.001)
Observations              2,155         2,251          2,469
Adjusted [R.sup.2]       0.143         0.108         0.049
Control Variables          Yes           Yes            Yes
Fixed-effects                       Director & Year

Panel B. Director and Firm Fixed-Effects

Tenure                   0.000        -0.020 *      -0.006 **
                        (0.908)       (0.078)       (0.010)
Tenure * Stock Return   -0.031 **
                        (0.017)
Observations              10,295        7,039         11,790
Adjusted [R.sup.2]       0.057         0.005         0.018
Control Variables          Yes           Yes            Yes
Fixed-effects                       Director & Firm

*** Significant at the 0.01 level.

** Significant at the 0.05 level.

* Significant at the 0.10 level.

Table XIII. General Directorship Experience

This table examines the effect of general directorship experience on
firm outcomes. A director is considered experienced if they have a
total of more than nine directorship-years of service over the past
five years. PROPJSXP is the proportion of these directors over all of
the independent directors on the board for Columns (2), (4), and (5),
and on the compensation (audit) committee for Column (1) (3). The
regressions in Columns (1) to (5) are from Column (4) in Table XI,
Column (4) in Table VII, Column (2) in Table VIII, Column (4) in
Table IX, and Column (1) in Table X, respectively. For brevity,
control variables that are specific to certain regressions (e.g.,
stock return for Turnover and M&A characteristics for CAR) are not
reported. Board Size is the log of the total number of directors.
%Independent is the number of independent directors divided by the
total number of directors. A busy director serves on the board of
three or more firms. Busy Board is an indicator set to one if half or
more of the independent directors are busy directors. Mean Dir Age is
the mean age of all independent directors. % Hired By CEO is the
ratio of CEO-hire independent directors of the board for Columns (2),
(4), and (5) of the compensation committee for Column (1), and of the
audit committee for Column (3). The CEO-Chairman flag is set to one
if the CEO is also the Chairman of the Board. CEO %Own is the total
number of shares and options that can be exercised within 60 days of
the fiscal year-end divided by the shares outstanding. Firm Size is
the log of total assets. Firm Age is the number of years the firm has
been listed. Tobin's q is (Assets - Book Equity + Market Equity)/
Assets. R&D is research and development expenses divided by assets.
Standard errors are robust and clustered by firm. The p-values are
in parentheses.

                                CEO           CEO        Financial
                            Compensation    Turnover    Irregularity

                                (1)           (2)           (3)

PROP_EXP                      0.149 **      0.017        -0.510
                             (0.035)       (0.407)       (0.466)
PROP_EXP*Stock Return                      -0.047
                                           (0.289)
Board Size                    0.180 *       0.026 *      -0.267
                             (0.084)       (0.056)       (0.684)
%Independent                  0.471 ***     0.016        -0.849
                             (0.000)       (0.465)       (0.321)
Busy Board                   -0.043         0.047 **      0.337
                             (0.504)       (0.014)       (0.494)
Mean Dir Age                  0.001        -0.000         0.004
                             (0.751)       (0.505)       (0.881)
% CEO-Hire                   -0.021         0.146 ***     0.053
                             (0.595)       (0.000)       (0.907)
CEO-Chairman                  0.182 ***    -0.139 ***     0.229
                             (0.000)       (0.000)       (0.490)
CEO Age                       0.276         0.090       -46.951 **
                             (0.576)       (0.116)       (0.038)
CEO Tenure                   -1.062 **      0.022        41.430 *
                             (0.039)       (0.217)       (0.088)
CEO % Ownership              -0.812 **     -0.114 **     -1 1.388
                             (0.015)       (0.012)       (0.049)
Firm Size                     0.406 ***     0.005 **      0.374 ***
                             (0.000)       (0.034)       (0.004)
Firm Age                     -0.000         0.001 ***    -0.003
                             (0.792)       (0.000)       (0.776)
R&D                           1.414 ***     0.013         0.498
                             (0.001)       (0.864)       (0.790)
Tobin's q                     0.093 ***    -0.006 **     -0.368
                             (0.000)       (0.015)       (0.160)
Observations                 13,620        14,105         8,134
Adjusted/Pseudo [R.sup.2]     0.418         0.064         0.121
Fixed-effects                            Industry, Year

                            Acquisition      CAR
                             Decisions

                                (4)          (5)

PROP_EXP                    -0.047 *       0.566
                            (0.068)       (0.451)
PROP_EXP*Stock Return

Board Size                   0.040 **     -0.481
                            (0.028)       (0.404)
%Independent                -0.000        -0.515
                            (0.995)       (0.547)
Busy Board                   0.025        -1.086
                            (0.245)       (0.135)
Mean Dir Age                 0.000         0.033
                            (0.623)       (0.264)
% CEO-Hire                   0.024 **      0.246
                            (0.036)       (0.525)
CEO-Chairman                 0.006         0.161
                            (0.401)       (0.514)
CEO Age                     -0.061 ***    -0.207
                            (0.002)       (0.603)
CEO Tenure                  -0.002        -0.655 *
                            (0.948)       (0.079)
CEO % Ownership             -0.156 **      2.241
                            (0.018)       (0.183)
Firm Size                    0.007 **     -0.190 *
                            (0.021)       (0.072)
Firm Age                    -0.001 *      12.639
                            (0.053)       (0.128)
R&D                          0.021        -6.197 **
                            (0.835)       (0.037)
Tobin's q                   -0.007 **     -0.069 **
                            (0.015)       (0.028)
Observations                13,429         3,454
Adjusted/Pseudo [R.sup.2]    0.044         0.044
Fixed-effects                   Industry, Year

*** Significant at the 0.01 level.

** Significant at the 0.05 level.

* Significant at the 0.10 level.
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Author:Dou, Ying; Sahgal, Sidharth; Zhang, Emma Jincheng
Publication:Financial Management
Date:Sep 22, 2015
Words:23074
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