Corporate Governance, Outside Directors and Firm Performance : Evidence from Japan

This paper investigates why corporations hire outside board of directors and how the outside directors affect firm performance. I use a sample of large Japanese corporations to test my hypotheses. Using a sample of 173 unique firms during the 2011-2021 period, I find that firms on average increase the presence of outside directors following poor performance, likely in response to greater pressure from the shareholders to increase management oversight. Additionally, I find that the presence of outside directors are positively associated with stock returns, while it does not contribute to firm’s profitability or relative valuation. As for the types of outside directors, I find that firm performance declines when firms have ex-government officials as outside directors, which suggests that these firms suffer from greater agency problems