The Importance of Board Independence (IVOR nr. 90) 2012/5.5:5.5 Conclusion

The Importance of Board Independence (IVOR nr. 90) 2012/5.5

5.5 Conclusion

Documentgegevens:

N.J.M. van Zijl, datum 05-10-2012

Datum: 05-10-2012
Auteur: N.J.M. van Zijl
JCDI: JCDI:ADS598336:1
Vakgebied(en): Ondernemingsrecht / Algemeen
Ondernemingsrecht / Corporate governance

(Consideration 5.1) The results of the meta-analysis with a sample of 52,182 company year observations of 43 studies from the last decade about the relationship between board independence and various measures of financial performance show a significant negative relationship between board independence and performance. Both ROA and Tobin ’s Q correlations show these significant negative relationships. When a pure distinction between accounting-based and market-based performance measures is made, only the accounting-based performance measures remain significantly negative. The results for the market-based measures are negative as well, but not significant. These results entail that the claims of the agency theory and TCE theory about the positive influence of independence on financial performance seem to be incorrect; and it shows that the importance of independence attributed by agency and TCE theorists cannot be substantiated with empirical results. The claim of the stewardship theory about the negative relationship between board independence and performance and the lack of importance attributed in this economic theoretical framework are supported by the results in this meta-analysis.

The previous chapter made a good start in answering the research question about the consequences of independence by cataloguing the relevant literature about the relationship between board independence and performance. However, the literature review was not able to formulate a conclusion about the relationship between independence and performance due to the different outcomes of the previous studies, variation in these outcomes, different sample sizes and other problems. Therefore, this chapter analyses the literature found quantitatively by means of a meta-analysis. In contrast to the literature review, the meta-analysis in this chapter does not suffer from selective inclusion of studies, differential subjective weighting of studies and other problems that accompany literature in this field.

(Consideration 5.2) The geographical moderator, which splits the total sample into a group of studies from the United States and a group from outside the United States, shows that ROA, Tobin ’s Q and accounting-based performance measures have a significant negative correlation with board independence in the United States. The correlation with market-based performance measures is negative, but insignificant. Correlations for outside the United States are positive in almost all cases, but only significant in the ROA sample and the accounting-based performance measures sample. The critical ratio cannot confirm that the two different geographical areas differ significantly. Although the direction of the results indicates a more positive relationship for studies from outside the United States than studies from the United States, this difference is not significant and cannot be claimed. Although the literature suggests that the market would like to pay a premium for good governance in countries with less stringent regulation, like the United States, the differences are stronger for accounting variables. The other three moderators – performance measures, definition of independence and board composition measure – are not able to explain the variability in results of the total sample.

The results show a negative relationship between board independence and performance, but the analysis has some limitations. Although a correction has been made for the different definitions of independence, not all the definitions are the same. Furthermore, the timeframes of the studies differ, just as the cultural environments, legislation and influence of other stakeholders in the countries in the analysis. All these factors influence the final result and might decrease the credibility of the results. However, the impact of board independence on performance is negative in a large sample of 52,182 company year observations.

Appendix

Academy of Management Journal	Journal of Business Venturing
Accounting and Business Research	Journal of Business, Finance and Accounting
Accounting Review	Journal of Contemporary Accounting and Economics
Administrative Science Quarterly	Journal of Corporate Finance
Applied Economics	Journal of Finance
British Accounting Review	Journal of Financial Economics
Contemporary Accounting Research	Journal of International Accounting, Auditing and Taxation
Corporate Governance: An International Review	Journal of International Financial Management and Accounting
Corporate Ownership and Control	Journal of Law and Economics
Entrepeneurship: Theory and Practice	Journal of Law, Economics and Organization
European Accounting Review	Journal of Management
European Financial Economics	Journal of Management Studies
European Journal of Law and Economics	Maandblad voor Accountancy & Bedrijfseconomie
Finance and Accounting	Management Science
International Journal of Auditing	Managerial and Decision Economics
International Journal of Management	Organization Science
Journal of Accounting and Economics	Pacific Accounting Review
Journal of Accounting and Public Policy	Scandinavian International Business Review
Journal of Accounting Research	Scandinavian Journal of Management
Journal of Applied Business Research	Scandinavian Journal of Management Studies
Journal of Applied Finance	SSRN
Journal of Business	Strategic Management Journal
Journal of Business Ethics	The International Journal of Accounting
Journal of Business Research	The RAND Journal of Economics
Journal of Business Strategy

References

Adams, R. B. and D. Ferreira (2009). ‘Women in the board room and their impact on governance and performance.’ Journal of Financial Economics 94(2): 291-309.

Ahmed, A. S. and S. Duellman (2007). ‘Accounting conservatism and board of director characteristics: An empirical analysis.’ Journal of Accounting and Economics 43(2-3): 411-437.

Anderson, R. C. and D. M. Reeb (2003). ‘Founding-Family Ownership and Firm Performance: Evidence from the S&P 500.’ The Journal of Finance 58(3): 1301-1328.

Anderson, R. C. and D. M. Reeb (2004). ‘Board Composition: Balancing Family Influence in S&P 500 Firms.’ Administrative Science Quarterly 49(2): 209-237.

Andres, P. d., V. Azofra and F. Lopez (2005). ‘Corporate Boards in OECD Countries: size, composition, functioning and effectiveness.’ Corporate Governance: An International Review 13(2): 197-210.

Becker, B. J. and M.-J. Wu (2007). ‘The Synthesis of Regression Slopes in Meta-Analysis.’ Statistical Science 22(3): 414-429.

Beekes, W., P. Pope and S. Young (2004). ‘The Link Between Earnings Timeliness, Earnings Conservatism and Board Composition: evidence from the UK.’ Corporate Governance: An International Review 12(1): 49-59.

Beiner, S., W. Drobetz, M. M. Schmid and H. Zimmermann (2006). ‘An Integrated Framework of Corporate Governance and Firm Valuation.’ European Financial Management 12(2): 249-283.

Bell, R. G., C. B. Moore and I. Filatotchev (2010). ‘Strategic and institutional effects on foreign IPO performance: Examining the impact of country of origin, corporate governance, and host country effects.’ Journal of Business Venturing Forthcoming.

Bhagat, S. and B. Bolton (2008). ‘Corporate governance and firm performance.’ Journal of Corporate Finance 14(3): 257-273.

Bliss, M. A. (2010). ‘Does CEO duality constrain board independence? Some evidence from audit pricing.’ Accounting and Finance Forthcoming.

Brandes, P., M. Hadani and M. Goranova (2006). ‘Stock options expensing: An examination of agency and institutional theory explanations.’ Journal of Business Research 59(5): 595-603.

Brick, I. E. and N. K. Chidambaran (2010). ‘Board meetings, committee structure, and firm value.’ Journal of Corporate Finance 16(4): 533-553.

Bruton, G. D., I. Filatotchev, S. Chahine and M. Wright (2010). ‘Governance, ownership structure, and performance of IPO firms: the impact of different types of private equity investors and institutional environments.’ Strategic Management Journal 31(5): 491-509.

Carter, D. A., F. D’Souza, B. J. Simkins and W. G. Simpson (2010). ‘The Gender and Ethnic Diversity of US Boards and Board Committees and Firm Financial Performance.’ Corporate Governance: An International Review 18(5): 396-414.

Charitou, A., C. Louca and N. Vafeas (2007). ‘Boards, ownership structure, and involuntary delisting from the New York Stock Exchange.’ Journal of Accounting and Public Policy 26(2): 249-262.

Cohn, L. D. and B. J. Becker (2003). ‘How Meta-Analysis Increases Statistical Power.’ Psychological Methods 8(3): 243-253.

Coles, J. L., N. D. Daniel and L. Naveen (2008a). ‘Boards: Does one size fit all?’ Journal of Financial Economics 87(2): 329-356.

Coles, J. L., M. L. Lemmon and Y. A. Wang (2008b). The Joint Determinants of Managerial Ownership, Board Independence, and Firm Performance.

Coles, J. W., V. B. McWilliams and N. Sen (2001). ‘An Examination of the Relationship of Governance Mechanisms to Performance.’ Journal of Management 27(1): 23-50.

Combs, J. G., D. J. Ketchen Jr., A. A. Perryman and M. S. Donahue (2007). ‘The Moderating Effect of CEO Power on the Board Composition–Firm Performance Relationship.’ Journal of Management Studies 44(8): 1299-1323.

Combs, J. G., C. R. Penney, T. R. Crook and J. C. Short (2010). ‘The Impact of Family Representation on CEO Compensation.’ Entrepreneurship Theory and Practice 34(6): 1125-1144.

Cornett, M. M., A. J. Marcus and H. Tehranian (2008). ‘Corporate governance and pay-for-performance: The impact of earnings management.’ Journal of Financial Economics 87(2): 357-373.

Dalton, D. R., C. M. Daily, A. E. Ellstrand and J. L. Johnson (1998). ‘Meta-Analytic Reviews of Board Composition, Leadership Structure, and Financial Performance.’ Strategic Management Journal 19: 269-290.

Dalton, D. R. and C. M. Dalton (2011). ‘Integration of Micro and Macro Studies in Governance Research: CEO Duality, Board Composition, and Financial Performance.’ Journal of Management 37(2): 404-411.

Deutsch, Y. (2007). ‘The Influence of Outside Directors’ Stock-Option Compensation on Firms’ R&D.’ Corporate Governance: An International Review 15(5): 816-827.

Deutsch, Y., T. Keil and T. Laamanen (2010). ‘A dual agency view of board compensation: the joint effects of outside director and CEO stock options on firm risk.’ Strategic Management Journal 32(2): 212-227.

Drakos, A. A. and F. V. Bekiris (2010). ‘Endogeneity and the Relationship Between Board Structure and Firm Performance: A Simultaneous Equation Analysis for the Athens Stock Exchange.’ Managerial and Decision Economics 31(6): 387-401.

Faleye, O. (2007). ‘Classified boards, firm value, and managerial entrenchment.’ Journal of Financial Economics 83(2): 501-529.

Fich, E. M. and A. Shivdasani (2006). ‘Are Busy Boards Effective Monitors?’ The Journal of Finance 61(2): 689-724.

Gani, L. and J. Jermias (2006). ‘Investigating the effect of board independence on performance across different strategies.’ The International Journal of Accounting 41(3): 295-314.

García-Meca, E. and J. P. Sánchez-Ballesta (2009). ‘Corporate Governance and Earnings Management: A Meta-Analysis.’ Corporate Governance: An International Review 17(5): 594-610.

Glass, G. V. (1976). ‘Primary, Secondary, and Meta-Analysis of Research.’ Educational Research 5(10): 3-8.

He, L. (2007). ‘Do founders matter? A study of executive compensation, governance structure and firm performance.’ Journal of Business Venturing 23(3): 257-279.

Henry, D. (2008). ‘Corporate Governance Structure and the Valuation of Australian Firms: Is There Value in Ticking the Boxes?’ Journal of Business Finance & Accounting 35(7-8): 912-942.

Hoskisson, R. E., M. A. Hitt, R. A. Johnson and W. Grossman (2002). ‘Conflicting Voices: The Effects of Institutional Ownership Heterogeneity and Internal Governance on Corporate Innovation Strategies.’ The Academy of Management Journal 45(4): 697-716.

Hsu, H.-E. (2010). ‘The Relationship between Board Characteristics and Financial Performance: An Empirical Study of United States Initial Public Offerings.’ International Journal of Management 27(2): 332-341.

Hunter, J. E. and F. L. Schmidt (1990). Methods of Meta-Analysis. London, Sage.

Hutchinson, M. and F. A. Gul (2004). ‘Investment opportunity set, corporatemgovernance practices and firm performance.’ Journal of Corporate Finance 10(4): 595-614.

Jermias, J. (2007). ‘The Effects of Corporate Governance on the Relationship between Innovative Efforts and Performance.’ European Accounting Review 16(4): 827-854.

Kiel, G. C. and G. J. Nicholson (2003). ‘Board Composition and Corporate Performance: how the Australian experience informs contrasting theories of corporate governance.’ Corporate Governance: An International Review 11(3): 189-205.

Klein, A. (2002). ‘Audit committee, board of director characteristics, and earnings management.’ Journal of Accounting and Economics 33(3): 375-400.

Kor, Y. Y. and J. T. Mahoney (2005). ‘How dynamics, management, and governance of resource deployments influence firm-level performance.’ Strategic Management Journal 26(5): 489-496.

Krivogorsky, V. (2006). ‘Ownership, board structure, and performance in continental Europe.’ The International Journal of Accounting 41(2): 176-197.

Lau, J., P. Sinnadurai and S. Wright (2009). ‘Corporate governance and chief executive officer dismissal following poor performance: Australian evidence. ’Accounting and Finance 49(1): 161-182.

Le, S. A., B. Walters and M. Kroll (2006). ‘The moderating effects of external monitors on the relationship between R&D spending and firm performance.’ Journal of Business Research 59(2): 278-287.

Li, J. and J. R. Harrison (2008). ‘National Culture and the Composition and Leadership Structure of Boards of Directors.’ Corporate Governance: An International Review 16(5): 375-385.

Lückerath-Rovers, M. and E. Smits (2010). ‘Onafhankelijke commissarissen en de relatie met performance in one-tier en two-tier bestuur.’ Maandblad voor Accountancy en Bedrijfseconomie 84(3): 152-163.

Minnick, K. and T. Noga (2010). ‘Do corporate governance characteristics influence tax management? .’ Journal of Corporate Finance 16(5): 703-718.

Mishra, C. S., T. Randøy and J. I. Jenssen (2001). ‘The Effect of Founding Family Influence on Firm Value and Corporate Governance.’ Journal of International Financial Management and Accounting 12(3): 235-259.

Nelson, T. (2003). ‘The persistence of founder influence: management, ownership, and performance effects at initial public offering.’ Strategic Management Journal 24(8): 707-724.

Orr, D., D. Emanuel and N. Wong (2005). ‘Board Composition and the Value of New Zealand Companies.’ Pacific Accounting Review 17(2): 103-121.

Randøy, T. and J. I. Jenssen (2004). ‘Board Independence and Product Market Competition in Swedish Firms.’ Corporate Governance: An International Review 12(3): 281-289.

Reeb, D. and A. Upadhyay (2010). ‘Subordinate board structures.’ Journal of Corporate Finance 16(4): 469-486.

Rhoades, D. L., P. L. Rechner and C. Sundaramurthy (2000). ‘Board Composition And Financial Performance: A Meta-Analysis Of The Influence Of Outside Directors.’ Journal of Managerial Issues 12(1): 76-91.

Rose, C. (2005). ‘The Composition of Semi-Two-Tier Corporate Boards and Firm Performance.’ Corporate Governance: An International Review 13(5): 691-701.

Setia-Atmaja, L. Y. (2009). ‘Governance Mechanisms and Firm Value: The Impact of Ownership Concentration and Dividends.’ Corporate Governance: An International Review 17(6): 694–709.

Shen, W. and A. A. Cannella Jr. (2002). ‘Revisiting the Performance Consequences of CEO Succession: The Impacts of Successor Type, Postsuccession Senior Executive Turnover, and Departing CEO Tenure.’ The Academy of Management Journal 45(4): 717-733.

Utts, J. M. (1996). Seeing Through Statistics. Belmont, International Thomson Publishing.

Wagner III, J. A., J. L. Stimpert and E. I. Fubara (1998). ‘Board Composition and Organizational Performance: Two Studies of Insider/outsider Effects.’ Journal of Management Studies 35(5): 655-677.

Walters, B. A., M. J. Kroll and P. Wright (2007). ‘CEO tenure, boards of directors, and acquisition performance.’ Journal of Business Research 60(4): 331-338.

Weir, C. and D. Laing (2003). ‘Ownership structure, board composition and the market for corporate control in the UK: an empirical analysis.’ Applied Economics 35(16): 1747-1759

Weir, C., D. Laing and P. J. McKnight (2002). ‘Internal and External Governance Mechanisms: Their Impact on the Performance of Large UK Public Companies.’ Journal of Business Finance & Accounting 29(5-6): 579-611.

Westphal, J. D. and M. E. Graebner (2010). ‘A Matter of Appearances: How Corporate Leaders Manage the Impressions of Financial Analysts about the Conduct of their Boards.’ The Academy of Management Journal 53(1): 15-43.

Williams, R. J. (2003). ‘Women on Corporate Boards of Directors and their Influence on Corporate Philanthropy ’ Journal of Business Ethics 42(1): 1-10.

Wintoki, M. B. (2007). ‘Corporate boards and regulation: The effect of the Sarbanes–Oxley Act and the exchange listing requirements on firm value.’ Journal of Corporate Finance 13(2-3): 229-250.

Wolf, F. M. (1986). Meta-Analysis – Quantitative Methods for Research Synthesis. Beverly Hills, Sage Publications.