Do independent directors provide a valuable a service to shareholders? That question has been the subject of inconclusive debate and study. However, two researchers approach the question from an unusual angle - the sudden deaths of independent directors - and show that these board members are indeed deemed beneficial to shareholder value.

Using data from 229 sudden deaths of corporate directors between 1994 and 2007, of whom 108 were independent directors, Bang Dang Nguyen and Kasper Meisner Nielsen show that sudden deaths of independent directors led to a drop in stock prices of 0.85 per cent on average. Given that the average capitalization of the firms they studied was $4 billion, the deaths decreased firm value by a significant $35 million.

"Our underlying argument is that if independent directors are beneficial to shareholders - as purveyors of advice to, and monitors of, top managers - then stock prices should react negatively to their deaths. While being tragic events, sudden deaths offer exogenous identification of how the markets value independent directors and alleviate endogeneity concerns related to the appointment and composition of the board of directors," they say.

In other words, sudden deaths are not related to the firms' current situation. Stock market reactions therefore are less likely to be clouded by other factors.

The authors find that the degree of independence of the board member influences the stock market reaction, upholding their main argument. For instance, longer tenure and being appointed by the current CEO are both considered indicative of less independence, and both are associated with a less negative reaction to sudden death. For every year of service on the board by a deceased member, the stock price was 0.16 per cent higher. For directors appointed by the current CEO, the cumulative abnormal return was 1.8 per cent higher.

The stock price impact was more negative when there were fewer outsiders on the board and when the deceased board member held the swing vote on the board. "Independence matters within the group of independent directors," the authors say.

The role of the board member also matters. If they were chair of the board or a member of the audit committee, then the negative impact was greater.

The authors also consider whether a board member's skills and abilities influence the results, which they tease out by looking at multiple directorships (the 229 directors in the study held 279 directorships). Independence still held value for shareholders and affected their reaction to the death.

"Overall the results demonstrate that independent directors provide a valuable service to shareholders. However, the value of their contribution depends on their very independence and could be vulnerable to the actions of powerful CEOs," they say.

Nonetheless, the authors say firms should use caution in drawing conclusions from their results since inside directors (appointed from within the firm) and grey directors (who have close ties with the firm, for examples as contractors or former employees) also have value.

"Adding more independent directors to a board might not always be beneficial. Some researchers find inside directors are more likely to possess superior information that, together with their experience, allows them to contribute to firm value. A board might be most value-enhancing when it allows both independent directors and inside directors to perform their roles optimally," they say.