Were Non-Independent Boards Really Captured Before SOX?

Following SOX, exchanges mandated majority independent boards and defined independence such that some directors could reclassify from non-independent to independent. Because membership is unchanged, reclassifications make a board more independent legally, but not economically. I exploit the plausibly exogenous nature of reclassification eligibility to compare "treatment" firms that altered board membership to similar "placebo" firms that reclassified directors instead. Consistent with the view that boards are chosen optimally, placebo firms outperformed treatment firms by 3.7%. Furthermore, the mandate, which reduced firm specific knowledge as inside directors departed, also impacted investment choices: Treatment firms subsequently shifted away from intangible investments