We investigate how governance reform affects board functioning and firm value through the labor market channel. We find that the presence of unseasoned independent directors (UIDs) after the 2002 enactment of the Sarbanes-Oxley Act (SOX) is more common in firms not compliant with the board and committee independence provisions. Further, the likelihood of UIDs being appointed to monitoring committees is significantly higher in the post-SOX period. Although investors on average react negatively to firm decisions to appoint UIDs in the pre-SOX period, this negative reaction is completely negated in the post-SOX era. We also find that the increased presence of UIDs in post-SOX boardrooms does not lead to low quality board monitoring and advising or poor firm performance. In some corporate events such as CEO turnover and financial reporting decisions, we find that boards with UIDs perform better than boards without UIDs. Overall, our findings highlight positive impact of governance reform on board functioning and firm value through its influence on directorial labor markets.
Keywords: Unseasoned independent directors, Labor market, Sarbanes-Oxley Act, Board of director, Monitoring and advisory roles
JEL Classification: G32, G34, J4
