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Are All Inside Directors the Same? Evidence from the External Directorship Market




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    • Ronald Masulis is at the Australian School of Business, University of New South Wales, the Owen Graduate School of Management, Vanderbilt University, and Vanderbilt Law School. Shawn Mobbs is at the Culverhouse College of Business, University of Alabama. We are grateful to Paul Chaney, Bill Christie, Campbell Harvey (the Editor), Craig Lewis, Charu Raheja, Hans Stoll, an anonymous associate editor, and an anonymous referee for extensive comments. The paper has also benefited from the comments and suggestions of Renée Adams, David Denis, Bill Megginson, Terri Shemwell, Laura Starks, Günter Strobl, and seminar participants at Drexel University, George Washington University, Northeastern University, Temple University, University of Alabama, University of Georgia, University of New South Wales, University of Oklahoma, University of Tennessee, Vanderbilt University's Economics Department, and Virginia Tech, as well as session participants at the 2007 FMA Annual Meetings, the 2008 Academy of Economics and Finance Annual Meetings, the 2008 Financial Intermediation Research Society Conference, the 2008 Conference on Empirical Legal Studies, the 2009 American Finance Association Annual Meetings, and the 2010 Asian Finance Association Annual Meetings. We also wish to acknowledge assistance from Vanderbilt University's Graduate School for a Dissertation Enhancement Grant and the Financial Markets Research Center at Vanderbilt University for faculty research support.


Agency theory and optimal contracting theory posit opposing roles and shareholder wealth effects for corporate inside directors. We evaluate these theories using the market for outside directorships to differentiate among inside directors. Firms with inside directors holding outside directorships have better operating performance and market-to-book ratios, especially when monitoring is more difficult. These firms make better acquisition decisions, have greater cash holdings, and overstate earnings less often. Announcements of outside board appointments improve shareholder wealth, while departure announcements reduce it, consistent with these inside directors improving board performance and outside directorships being an important source of inside director incentives.