The value of independent directors: Evidence from sudden death

We investigate the contributions of independent directors to shareholder value by examining the stock price reaction to an exogenous event: sudden deaths of directors. Compiling an extensive database of sudden deaths of 270 directors in the U.S. from 1994 to 2007, we find that following the death of an independent director, the firm’s stock price drops by almost 1 % on average. For our control sample of inside or gray directors, we find that stock prices do not react in any significant way to these events. This difference in abnormal returns following the sudden deaths of independent, gray and inside directors is statistically and economically significant. Positions in board, experience, age, and educational backgrounds are the main determinants of the negative abnormal returns. Consistent with the value of independent directors, we find that stock prices react less negatively when the independent director has long tenure or is a senior board member. Overall, our results demonstrate that independent directors provide a service valued by shareholders