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Estimating the effect of board independence on managerial ownership using a quasi-natural experiment

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  • Pornsit Jiraporn
  • Kridsda Nimmanunta

Abstract

Grounded in agency theory, this article investigates the effect of board independence on managerial ownership. We exploit the passage of the Sarbanes–Oxley Act and the associated exchange listing requirements as an exogenous regulatory shock that raises board independence. Our difference-in-difference estimates show that board independence leads to significantly higher managerial ownership. In particular, firms forced to raise board independence exhibit managerial ownership that is 26.35% higher, relative to firms not required to raise board independence. Thus, board independence and managerial equity ownership constitute governance mechanisms that act as complements, rather than substitutes. Our empirical strategy relies on a quasi-natural experiment and is far more likely to show a causal effect than what has been documented in the literature. Finally, an instrumental-variable analysis reinforces our conclusion.

Suggested Citation

  • Pornsit Jiraporn & Kridsda Nimmanunta, 2018. "Estimating the effect of board independence on managerial ownership using a quasi-natural experiment," Applied Economics Letters, Taylor & Francis Journals, vol. 25(17), pages 1237-1243, October.
    • Handle: RePEc:taf:apeclt:v:25:y:2018:i:17:p:1237-1243
    DOI: 10.1080/13504851.2017.1412072
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    Cited by:

    1. Pandej Chintrakarn & Pornsit Jiraporn & Shenghui Tong & Napatsorn Jiraporn & Richard Proctor, 2020. "How do independent directors view corporate social responsibility (CSR)? Evidence from a quasi‐natural experiment," The Financial Review, Eastern Finance Association, vol. 55(4), pages 697-716, November.
    2. Chindasombatcharoen, Pongsapak & Chatjuthamard, Pattanaporn & Jiraporn, Pornsit, 2023. "Corporate culture, cultural diversification, and independent directors: Evidence from earnings conference calls," Journal of Behavioral and Experimental Finance, Elsevier, vol. 37(C).
    3. Chatjuthamard, Pattanaporn & Jiraporn, Pornsit & Treepongkaruna, Sirimon, 2021. "How do independent directors view generalist vs. specialist CEOs? Evidence from an exogenous regulatory shock," International Review of Financial Analysis, Elsevier, vol. 78(C).
    4. Ongsakul, Viput & Jiraporn, Pornsit, 2019. "How do independent directors view powerful executive risk-taking incentives? A quasi-natural experiment," Finance Research Letters, Elsevier, vol. 31(C).

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