Hostname: page-component-f554764f5-68cz6 Total loading time: 0 Render date: 2025-04-16T17:40:18.341Z Has data issue: false hasContentIssue false
  • English
  • Français

Does Board Independence Increase Firm Value? Evidence from Closed-End Funds

Published online by Cambridge University Press:  21 May 2020

Matthew E. Souther Open the ORCID record for Matthew E. Souther [Opens in a new window]
Matthew E. Souther*
Affiliation:
Souther, [email protected], University of South Carolina Moore School of Business
*
Souther, [email protected]
Get access Rights & Permissions [Opens in a new window]

Abstract

Researchers disagree about the impact of board independence on firm value. The disagreement generally stems from the endogenous nature of board appointments. I add new evidence to this discussion by using a sample of closed-end funds to document the value-enhancing effects of independent boards. Using cross-sectional, difference-in-differences, and instrumental variables techniques, I address these endogeneity concerns and find consistent evidence that board independence is associated with higher firm value.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 56 , Issue 1 , February 2021 , pp. 313 - 336
Copyright
© Michael G. Foster School of Business, University of Washington 2019

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Article purchase

Temporarily unavailable

Footnotes

This paper benefited from feedback provided by Ryan Flugum, Rachel Gordon, John Howe, Jeffrey Pontiff (the referee), Tina Yang, Adam Yore, and participants of the 2017 Financial Management Association meeting. I am also grateful for research support from both the University of Florida and the University of Missouri, where portions of this project were completed.

References

Agrawal, A., and Knoeber, C. R.. “Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders.” Journal of Financial and Quantitative Analysis, 31 (1996), 377–397.Google Scholar
Anderson, R. C.; Mansi, S. A.; and Reeb, D. M.. “Board Characteristics, Accounting Report Integrity, and the Cost of Debt.” Journal of Accounting and Economics, 37 (2004), 315–342.Google Scholar
Barclay, M. J.; Holderness, C. G.; and Pontiff, J.. “Private Benefits from Block Ownership and Discounts on Closed-End Funds.” Journal of Finance Economics, 33 (1993), 263–291.Google Scholar
Barclay, M. J., and Smith, C. W. Jr. “The Maturity Structure of Corporate Debt.” Journal of Finance, 50 (1995a), 609–631.Google Scholar
Barclay, M. J., and Smith, C. W. Jr. “The Priority Structure of Corporate Liabilities.” Journal of Finance, 50 (1995b), 899–917.Google Scholar
Bebchuk, L.; Cohen, A.; and Ferrell, A.. “What Matters in Corporate Governance? ” Review of Financial Studies, 22 (2009), 783–827.Google Scholar
Bhagat, S., and Black, B.. “The Uncertain Relationship between Board Composition and Firm Performance.” Business Lawyer, 54 (1999), 921–963.Google Scholar
Boone, A. L.; Field, L. C.; Karpoff, J. M.; and Raheja, C. G.. “The Determinants of Corporate Board Size and Composition: An Empirical Analysis.” Journal of Finance Economics, 85 (2007), 66–101.Google Scholar
Borokhovich, K. A.; Parrino, R.; and Trapani, T.. “Outside Directors and CEO Selection.” Journal of Financial and Quantitative Analysis, 31 (1996), 337–355.Google Scholar
Byrd, J. W., and Hickman, K. A.. “Do Outside Directors Monitor Managers?: Evidence from Tender Offer Bids.” Journal of Finance Economics, 32 (1992), 195–221.Google Scholar
Cherkes, M.“Closed-End Funds: A Survey.” Annual Review of Financial Economics, 4 (2012), 431–445.Google Scholar
Cherkes, M.; Sagi, J.; and Stanton, R.. “A Liquidity-Based Theory of Closed-End Funds.” Review of Financial Studies, 22 (2009), 257–297.Google Scholar
Coles, J. L.; Daniel, N. D.; and Naveen, L.. “Boards: Does One Size Fit All? ” Journal of Finance Economics, 87 (2008), 329–356.Google Scholar
Coles, J. L.; Daniel, N. D.; and Naveen, L.. “Co-Opted Boards.” Review of Financial Studies, 27 (2014), 1751–1796.Google Scholar
Cotter, J. F.; Shivdasani, A.; and Zenner, M.. “Do Independent Directors Enhance Target Shareholder Wealth during Tender Offers? ” Journal of Finance Economics, 43 (1997), 195–218.Google Scholar
Dalton, D. R.; Daily, C. M.; Johnson, J. L.; and Ellstrand, A. E.. “Number of Directors and Financial Performance: A Meta-Analysis.” Academy of Management Journal, 42 (1999), 674–686.Google Scholar
Del Guercio, D.; Dann, L. Y.; and Partch, M. M.. “Governance and Boards of Directors in Closed-End Investment Companies.” Journal of Finance Economics, 69 (2003), 111–152.Google Scholar
Elton, E. J.; Gruber, M. J.; Blake, C. R.; and Shachar, O.. “Why Do Closed-End Bond Funds Exist? An Additional Explanation for the Growth in Domestic Closed-End Bond Funds.” Journal of Financial and Quantitative Analysis, 48 (2013), 403–425.Google Scholar
Fich, E. M.“Are Some Outside Directors Better than Others? Evidence from Director Appointments by Fortune 1000 Firms.” Journal of Business, 78 (2005), 1943–1972.Google Scholar
Field, L. C., and Karpoff, J. M.. “Takeover Defenses of IPO Firms.” Journal of Finance, 57 (2002), 1857–1889.Google Scholar
Gompers, P.; Ishii, J.; and Metrick, A.. “Corporate Governance and Equity Prices.” Quarterly Journal of Economics, 118 (2003), 107–155.Google Scholar
Hermalin, B. E., and Weisbach, M. S.. “The Determinants of Board Composition.” RAND Journal of Economics, 19 (1988), 589–606.Google Scholar
Hermalin, B. E., and Weisbach, M. S.. “The Effects of Board Composition and Direct Incentives on Firm Performance.” Financial Management, 20 (1991), 101–112.Google Scholar
Hermalin, B. E., and Weisbach, M. S.. “Endogenously Chosen Boards of Directors and Their Monitoring of the CEO.” American Economic Review, 88 (1998), 96–118.Google Scholar
Hermalin, B. E., and Weisbach, M. S.. “Boards of Directors as an Endogenously Determined Institution: A Survey of the Economic Literature.” Federal Reserve Bank of New York Policy Review, 9 (2003), 7–26.Google Scholar
Hwang, B.“Country-Specific Sentiment and Security Prices.” Journal of Financial Economics, 100 (2011), 382–401.Google Scholar
Jensen, M. C., and Meckling, W. H.. “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.” Journal of Finance Economics, 3 (1976), 305–360.Google Scholar
Karamanou, I., and Vafeas, N.. “The Association between Corporate Boards, Audit Committees, and Management Earnings Forecasts: An Empirical Analysis.” Journal of Accounting Research, 43 (2005), 453–486.Google Scholar
Karpoff, J.; Lee, D.; and Martin, G.. “The Consequences to Managers for Financial Misrepresentation.” Journal of Financial Economics, 88 (2008a), 193–215.Google Scholar
Karpoff, J.; Lee, D.; and Martin, G.. “The Costs to Firms of Cooking the Books.” Journal of Financial and Quantitative Analysis, 39 (2008b), 581–612.Google Scholar
Kedia, S., and Rajgopal, S.. “Do the SEC Enforcement Preferences Affect Corporate Misconduct? ” Journal of Accounting and Economics, 51 (2011), 259–278.Google Scholar
Klein, A.“Firm Performance and Board Committee Structure.” Journal of Law & Economics, 41 (1998), 275–304.Google Scholar
Knyazeva, A.; Knyazeva, D.; and Masulis, R. W.. “The Supply of Corporate Directors and Board Independence.” Review of Financial Studies, 26 (2013), 1561–1605.Google Scholar
Kumar, P., and Sivaramakrishnan, K.. “Who Monitors the Monitor? The Effect of Board Independence on Executive Compensation and Firm Value.” Review of Financial Studies, 21 (2008), 1371–1401.Google Scholar
Lee, C. M. C.; Shleifer, A.; and Thaler, R. H.. “Investor Sentiment and the Closed-End Fund Puzzle.” Journal of Finance, 46 (1991), 75–109.Google Scholar
Lehn, K. M.; Patro, S.; and Zhao, M.. “Determinants of the Size and Composition of US Corporate Boards: 1935–2000.” Financial Management, 38 (2009), 747–780.Google Scholar
Malkiel, B. G.“The Valuation of Closed-End Investment Company Shares.” Journal of Finance, 32 (1977), 847–859.Google Scholar
Mallette, P., and Fowler, K. L.. “Effects of Board Composition and Stock Ownership on the Adoption of ‘Poison Pills. ”’ Academy of Management Journal, 35 (1992), 1010–1035.Google Scholar
Mehran, H.“Executive Compensation Structure, Ownership, and Firm Performance.” Journal of Finance Economics, 38 (1995), 163–184.Google Scholar
Nguyen, B. D., and Nielsen, K. M.. “The Value of Independent Directors: Evidence from Sudden Deaths.” Journal of Finance Economics, 98 (2010), 550–567.Google Scholar
Petersen, M. A.“Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches.” Review of Financial Studies, 22 (2009), 435–480.Google Scholar
Pfeffer, J.“Size and Composition of Corporate Boards of Directors: The Organization and Its Environment.” Administrative Science Quarterly, 17 (1972), 218–228.Google Scholar
Pontiff, J.“Closed-End Fund Premia and Returns: Implications for Financial Market Equilibrium.” Journal of Finance Economics, 37 (1995), 341–370.Google Scholar
Pontiff, J.“Costly Arbitrage: Evidence from Closed-End Funds.” Quarterly Journal of Economics, 111 (1996), 1135–1151.Google Scholar
Pontiff, J.“Costly Arbitrage and the Myth of Idiosyncratic Risk.” Journal of Accounting and Economics, 42 (2006), 35–52.Google Scholar
Rosenstein, S., and Wyatt, J. G.. “Outside Directors, Board Independence, and Shareholder Wealth.” Journal of Financial Economics, 26 (1990), 175–191.Google Scholar
Ryan, H. E. Jr, and Wiggins, R. A. III. “Who Is in Whose Pocket? Director Compensation, Board Independence, and Barriers to Effective Monitoring.” Journal of Finance Economics, 73 (2004), 497–524.Google Scholar
Shivdasani, A., and Yermack, D.. “CEO Involvement in the Selection of New Board Members: An Empirical Analysis.” Journal of Finance, 54 (1999), 1829–1853.Google Scholar
Souther, M. E.“The Effects of Takeover Defenses: Evidence from Closed-End Funds.” Journal of Finance Economics, 119 (2016), 420–440.Google Scholar
Souther, M. E.“The Effects of Internal Board Networks: Evidence from Closed-End Funds.” Journal of Accounting and Economics, 66 (2018), 266–290.Google Scholar
Tufano, P., and Sevick, M.. “Board Structure and Fee-Setting in the U.S. Mutual Funds Industry.” Journal of Finance Economics, 46 (1997), 321–355.Google Scholar
Weisbach, M. S.“Outside Directors and CEO Turnover.” Journal of Finance Economics, 20 (1988), 431–460.Google Scholar
Yermack, D.“Higher Market Valuation of Companies with a Small Board of Directors.” Journal of Finance Economics, 40 (1996), 185–211.Google Scholar