Do Independent Directors Cause Improvements in Firm Transparency?

Abstract:     
Recent research finds that firms characterized by high corporate transparency have a greater proportion of independent directors. The causality of this relation, however, is unclear. One branch of the governance literature takes corporate transparency as fixed and shows that the effective level of board independence is dictated by exogenous variation in the information environment. Another branch, mainly in accounting, argues that independent directors can instigate changes in transparency. We examine a regulatory shock that substantially increased board independence for some firms, and find that information asymmetry, and to some extent disclosure and financial intermediation, changed at firms affected by this shock. We also examine whether these results are muted when management is more entrenched or when information processing costs are relatively high. Our results suggest that corporate transparency can be altered to better suit the informational demands of a given board structure.

Number of Pages in PDF File: 47

working papers series