Do Independent Directors Mitigate Firm Litigation Risks?

We investigate whether board independent directors mitigate firm’s securities litigation risks. We further analyze this inquiry with special attention to firm’s complexity, monitoring costs, and the relative benefits and costs of board independence. Separate and combined analyses of these features are conducted. Our findings indicate that independent directors reduce securities litigation risk. Further, independent directors’ effectiveness falls with increases in the firm’s monitoring cost, but rises as the firm’s complexity increases. Our results, which are derived on the premise of the agency theory, are robust across several alternatives and nested variations, including considerations of endogeneity and heterogeneity