limited set of governance attributes and other firm characteristics. At a minimum, to solidly establish association (even without identification), one would want to use time series data and a firm fixed effects specification to address whether unobserved time-invariant firm characteristics explain an observed correlation between governance and market value.

# **6.1 Board Composition and Performance**

The first method has been to examine contemporaneous correlations between accounting measures of performance and the proportion of outside directors on the Board. The presence of outside directors in the Board and measures of accounting performance appears to be not significantly related, both when standard accounting performance measures are used, as in MacAvoy et al. (1983), Hermalin and Weisbach (1991), Mehran (1995), Klein (1998), and Bhagat and Black (2000) and when Tobin’s Q is used as a measure of performance, as in Morck et al. (1988). Even correcting for endogeneity using instrumental variables, both Hermalin and Weisbach (1991) and Bhagat and Black (2000) found no empirical relationship between Board composition and firm performance.

Yermack (1996), Agrawal and Knoeber (1996) and Bhagat and Black (2002) find a negative relationship in the U.S., as do Erickson, Park, Reising, and Shin (2005) in Canada. Bhagat and Black (2002) and Erickson _et al._ (2005) report evidence that the negative relationship reflects reverse causation, in which firms which experience poor performance increase the independence of their Boards. In the U.K., Arcot and Bruno (2006) and MacNeil (2006) report that well-performing firms are more likely to depart from the "comply or explain" recommendation to have at least 3 outside directors. The only study with plausible identification is Dahya & McConnell (2007). They find improved operating performance for U.K. firms which previously had only one or two outside directors, but increase this number to three to comply with the Cadbury Committee “comply or explain”. However, identification is imperfect, because firms can still choose to have fewer than three outside directors. Wintoki, Linck & Netter (2007) find a negative relationship between independence and performance using OLS, which flips sign with firm fixed effects and disappears with GMM approach with U.S. data. On the theoretical side, as shown in the section above, there is no reason to expect a monotonic relationship between Board independence and measure of firm performance or value.

In contrast to the mixed findings in developed markets, several studies find a positive crosssectional relationship between Board independence and firm performance. Positive effects of director independence have been found in several individual countries, including Korea (Black, Jang and Kim, 2006a and Choi, Park and Yoo, 2007, Black and Kim, 2008); Taiwan (Yeh and Woidtke, 2005), and Ukraine (Zheka, 2006) and Black & Khanna (2007, India). As reported in Section 3, in response to the East Asian financial crisis, Korea adopted governance rules including the introduction of 50% outside directors, an audit committee with an outside chair and at least 2/3 outside members, and an outside director nominating committee. Smaller firms were also required to have 25% outside directors. Black & Kim (2008) finds in a firm fixed effects framework: i) similar share price gains for large firms, which are legally required to change Board structure, and smaller firms which do so voluntarily; and ii) evidence for the separate value of Board independence and the introduction of audit committees. Dahya, Dimitrov, and McConnell (2007) report cross-country evidence for a 22-country sample 19