THANKS! And great timing. I teach my class on this next week. I was able to update my link to your website thanks to you.

that’s the wrong word

It's dramatic tho

Congrats! Very cool and well done paper

😬

Much more in the paper (linked)

I'm not at #ASSA2025 (new kids) but able and willing to connect otherwise!

11/11

This paper is an example of how nice it is to work with great coauthors AND how great peer review can be. (Weird? But true!) We got wonderful feedback from referees at the JFQA previously and our current editorial team, and these have materially improved the paper. We are very grateful.

10/

Policy implication: One-size-fits-all governance mandates can harm firms by forcing out directors with valuable firm-specific knowledge. More flexible approaches might better balance monitoring & advising roles.

Firms know this & recognize value of their dirs and so reclass when possible.

9/N

Mechanism: Reclassified directors had ~25% more board experience & were 60pp more likely to be former employees. When firms couldn't reclassify, new directors focused more on monitoring (20% more likely to join audit committees) vs advising.

8/N

Design insight: Previous work compared compliant vs non-compliant firms. This paper's triple-diff compares reclassifying vs non-reclassifying firms within the non-compliant group. Cleaner identification.

7/N

Key findings: Non-reclassifying firms saw ROA decline by 2.7pp vs reclassifiers.

Main channel? Labor efficiency. These firms had higher SG&A costs, lower sales/profits per employee, and their 10Ks discuss process innovation less -> 📉 of op. expertise as knowledgeable directors depart 🛫

6/N

Reclassifying firms (R=1) became compliant with exchange independence quickly via this way (panel 2), even though ISS classifications of their directors remain least independent (panel 3).

Upshot: R firms are able to retain employee directors at much higher rate (panel 4)

5/N

Identification: Some firms could reclassify directors as "independent" (eg if they retired > 3 years ago) while others had to hire new outside directors. Reclassification eligibility was largely predetermined before mandates > quasi-random variation in compliance strategy that we can exploit.

4/N

Takeaways
1. Inside dir advice is performance relevant via oper. efficiency
2. Insiders <=/=> agency problems
3. Gov standards disregard pre-existing governance arrangements (which tradeoff monitor/advice)
4. Speaks to policy debates (eg the push for maximal independence)

3/N

Punchline: After the 2002 NYSE/NASDAQ board independence mandates, firms that replaced existing non-independent directors underperformed firms that retained these directors by reclassifying them as independent. Suggests valuable firm-specific knowledge was lost.

2/N

Lesson: don't start your social media life during a hectic working lunch - I didn't change the author names in the first post 🤣

Well I'm (mostly) happy to hear that!

I’m very excited to now be able to follow this saga on main, now that I’m not just a lurker. 🤘

Thanks and apologies to @lukestein.com for the thread copy. Can't improve on this!

There’s more in the draft lukeste.in/llmmortgage

Obviously no one should (/would?😢) make critical financial decisions using prompts so simple. But genAI is getting deployed and importance of audits and intentional design are even more important in more complex systems!

Fin.