When are ‘Friendly Outside Directors’ Beneficial to Firms?

Using Korean firms between 1999 and 2006, we show that friendly outside directors with business, professional or social ties with a firm improve Tobin s Q when firms face M&A threats, distress, financial volatility, or stricter regulatory environments. Independent outside directors without such ties increase firm value in firms with low information transaction costs or high potential agency costs. Our analyses suggest that friendly outside directors can be better advisors or political liaisons while independent directors are better monitors, controlling for endogeneity issues and directors’ expertise and social networks given the corporate environments and characteristics.