Other papers have used the number of interlocked outside directors as a proxy for the effectiveness of board oversight in different contexts.
Following previous work (Hallock, 1997), we focus on interlocked directors that involve one inside director and one outside director since these types of interlocks are the most likely to compromise the monitoring effectiveness of boards.
Because we wish to compare the impact of interlocked boards as defined above to noninterlocked boards, we eliminate 330 firm-years involving other types of interlock (e.
We next examine, in greater detail, the interlocked observations in our sample period.
Since any pair of interlocked directors may repeat from year to year if their directorships do not change, we also identify their initial occurrence in our sample period.
To provide evidence regarding whether interlocked directors are associated with weak monitoring, we examine the association between the presence of interlocked directors and firm performance.
This is an important control variable that enables us to distinguish between the effects of interlocked directors and "busy" directors.
To the extent that lower proportions of CEO equity ownership reduce the incentive to devote attention to their own board, we expect lower levels of CEO ownership to be positively correlated with the incidence of interlocked boards.
Table IV reports the means and medians of performance measures, governance, and financial control variables for the 118 firm-years of interlocked firms (Column 2) and the 3,448 firm-years of noninterlocked firms in the sample (Column 3), together with the p-values for differences in means (medians) using the standard difference-in-means test (Wilcoxon test) in Column 4.
One characteristic that is significantly different between the interlocked and noninterlocked samples is firm size.
Multivariate Analysis of Interlocked Directors and Firm Performance