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Board independence and the variability of firm performance: Evidence from an exogenous regulatory shock

Author

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  • Ron Bird

    (Waikato Management School, The University of Waikato, Hamilton, New Zealand; The Investment Management Research Centre, University of Technology Sydney, Sydney, NSW, Australia)

  • Peng Huang
  • Yue Lu

    (Waikato Management School, The University of Waikato, Hamilton, New Zealand)

Abstract

We use the 2003 NYSE and NASDAQ listing rules for board independence as an exogenous shock to estimate the causal relation between board independence and the variability of firm performance. Using a difference-in-difference approach, we find that non-compliant firms without a majority of independent directors observe a larger decrease in the variability of firm performance than compliant firms. In particular, board independence is negatively associated with the variability of (1) monthly stock returns, (2) ROA, (3) Tobin’s Q, (4) analyst forecast inaccuracy, (5) accounting accruals, (6) extraordinary items, (7) capital expenditures, (8) cash holdings and (9) the frequency of acquisition activities. We conclude that increased board independence weakens the CEO’s power over the board and restrains corporate risk-taking; thus, decisions made by firms with more independent boards are less extreme, resulting in less variability of firm performance.

Suggested Citation

  • Ron Bird & Peng Huang & Yue Lu, 2018. "Board independence and the variability of firm performance: Evidence from an exogenous regulatory shock," Australian Journal of Management, Australian School of Business, vol. 43(1), pages 3-26, February.
    • Handle: RePEc:sae:ausman:v:43:y:2018:i:1:p:3-26
    DOI: 10.1177/0312896217708227
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    3. Martina K Linnenluecke & Mauricio Marrone & Abhay K Singh, 2020. "Conducting systematic literature reviews and bibliometric analyses," Australian Journal of Management, Australian School of Business, vol. 45(2), pages 175-194, May.
    4. Bansal, Shashank & Thenmozhi, M., 2020. "Does concentrated founder ownership affect board independence? Role of corporate life cycle and ownership identity," Pacific-Basin Finance Journal, Elsevier, vol. 62(C).
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    6. Sujuan Xie & Yue Xu & Yamin Zeng & Junsheng Zhang, 2019. "Ultimate parent board reform and corporate overinvestment: a quasi‐natural experiment study," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 58(5), pages 1469-1501, March.

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    More about this item

    Keywords

    Board independence; exogenous regulatory shock; firm performance variability;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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