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

• Published in: Australian journal of management Vol. 43; no. 1; pp. 3 - 26
• Main Authors: Bird, Ron, Huang, Peng, Lu, Yue
• Format: Journal Article
• Language: English
• Published: London, England SAGE Publications 01.02.2018; Sage Publications Ltd
• Subjects: Accrual basis accounting; Boards of directors; Business enterprises; Corporate governance; Evidence; Expenditures, Public; Finance; Independence; Outside directors; Risk management; Social aspects; G34; exogenous regulatory shock; firm performance variability; Board independence
• ISSN: 0312-8962; 1327-2020
• DOI: 10.1177/0312896217708227

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.