Board Independence, CEO Ownership, and Compensation* Hae Jin Chung** Korea Advanced Institute of Science and Technology, Republic of Korea Kose John New York University, New York, USA and Temple University, Philadelphia, USA; Received 3 August 2016; Accepted 28 March 2017 Abstract Using the percentage of outside directors as a proxy for board monitoring, we find empirical evidence that board monitoring and CEO pay–performance sensitivity (PPS) are substitutes. In 2002, major US exchanges began to require that the boards of listed firms have more than 50% outside directors. In the case of firms affected by this requirement, their CEO PPS decreased significantly because of a reduction of CEO ownership relative to the control group, especially in the case of firms in which outside directors are better informed. We find that this substitution in governance mechanisms did not change overall firm value. Keywords Board independence; Board regulation; Corporate governance; Managerial com- pensation; Managerial ownership JEL Classification: G34, G38, K22 *We thank Jennifer N. Carpenter, Jaewon Choi, Andre de Souza, Ran Duchin, Koren Jo, Jihay Ellie Kwack, Craig M. Lewis, Sadi Ozelge, Enrichetta Ravina, Anjolein Schmeits, Rik Sen, Lemma Senbet, Rene Stulz, Daniel Wolfenzon, David Yermack, and seminar participants at the 2008 FMA Doctoral Consortium, the 2009 FMA Meetings, Korea Advanced Institute of Science and Technology, Nanyang Technological University, New York University, Seoul National University, Sungkyunkwan University, University of Amsterdam, Vrije University Amsterdam for helpful comments. We thank Induck Hwang for excellent data collection and research assistance. This is a revised version of a paper previously circulated as “Board Inde- pendence and CEO Incentives.” **Corresponding author: Hae Jin Chung, Korea Advanced Institute of Science and Technol- ogy (KAIST), College of Business, 85 Hoegiro Dongdaemoon-Gu, Seoul 02455, Korea. Tel: +82-2-958-3625, Fax: +82-2-958-3620, email: hjchung@business.kaist.ac.kr. Asia-Pacific Journal of Financial Studies (2017) 0, 1–25 doi:10.1111/ajfs.12179 © 2017 Korean Securities Association 1