Journal of Financial Economics 32 (1992) 195-221. North-Holland Do outside directors monitor managers? Evidence from tender offer bids* John W. Byrd Forr Lewis College, Durango. CO 81301. USA Kent A. Hickman Gonzaga Unirersity. Spokane, WA 99258. USA Received April 1991, final version received October 1991 Examining 128 tender offer bids made from 1980 through 1987. we categorize outside directors as either independent of or having some affiliation with managers, and find that bidding firms on which independent outside directors hold at least 50% of the seats have significantly higher announce- ment-date abnormal returns than other bidders. However, the relationship between bidding firms’ abnormal stock returns and the proportion of board seats held by independent outside directors is nonlinear. suggesting it is possible to have too many independent outside directors. All results are lost if the traditional inside-outside board classification method zyxwvutsrqponmlkjihgfedcbaZYXW is use d. 1. Introduction In publicly-traded corporations, the board of directors is charged with pro- tecting and promoting the interests of shareholders. The board has the legal authority to ratify and monitor managerial initiatives, evaluate the performance of top managers, and reward or penalize that performance. Most corporate Correspondence to: John Byrd. 64 Oak Valley Drive, Durango, CO 81301. USA. *We thank Hugh Haworth of the SEC for providing a copy of the tender offer database. We appreciate the comments on earlier drafts of the paper provided by Michael Jensen (the editor), Jon Karpoff. Roberta Romano, Stuart Rosenstein, Dennis Sheehan (the referee), Jeffrey Wyatt, and workshop participants at Texas A&M University, the University of Oregon, Washington State University. the University of Arizona, and Arizona State University, especially Barry Baysinger, Saeyoung Chang. Larry Dann, Michael Hertzel, Michael Hopewell, Marilyn Johnson. Scott Lee. Scott Lummer, Wayne Mikkelson, Helena Mullins, George Racette, Richard Smith. Thomas Turk, and Wanda Wallace. John McDowell and Danny Cooper provided valuable research assistance. Much of the work on this paper was done while the authors were at Washington State University. 0304405X. 92,$05.00 C 1992-Elsevier Science Publishers B.V. All rights reserved