When do firms benefit from affiliated outside directors? Evidence from Korea

Abstract

AbstractManuscript TypeEmpiricalResearch Question/IssueDirectors can serve different roles: advisors, liaisons, or monitors. Affiliated outside directors have social or business/financial ties to firm executives, are often more trusted than others by the latter, have more knowledge of the firm, give better advice, or liaise more effectively with other organizations. However, they monitor less effectively than other outside directors do. This study theoretically predicts and empirically examines whether affiliated outside directors' contributions to firm value are moderated by corporate conditions: external control threats, uncertainty, government regulation, or information asymmetry.Research Findings/InsightsPanel data analysis shows that among firms that are standalone, have M&A threats, suffer financial distress, face financial uncertainty, or are subject to stricter government regulations, those with more affiliated outside directors—especially those with social ties—have greater firm value. In low information asymmetry environments, firms with more affiliated outside directors have lower firm value. In high information asymmetry environments, however, firms with more independent outside directors have lower firm value. These results remain robust after controlling for endogeneity issues of board composition, outside directors' human capital, social capital, CEO attributes, firm attributes, and industry attributes.Theoretical/Academic ImplicationsThis study extends and links resource dependence theory and agency theory by showing how outside directors with social ties and those with business ties are related to firm value. Furthermore, the value of affiliated outside directors' resources and liaisons differ across corporate conditions, which extends resource dependence theory. Also, effective monitoring by unaffiliated outside directors requires sufficient access to firm information, which extends agency theory.Practitioner/Policy ImplicationsThe relations of different outside directors to firm value across corporate conditions suggest that firms can benefit from considering their corporate conditions when designing the composition of their board of directors.