Board Structure and Price Informativeness

Abstract

We develop and test the hypothesis that private information incorporated into stock prices (price informativeness) affects the structure of corporate boards. We find a negative relation between measures of price informativeness and measures of board independence. This finding is robust to the inclusion of many firm-level controls - including firm fixed effects - and to the choice of the measure of price informativeness. Consistent with the hypothesis that price informativeness and board monitoring are substitutes, this relationship is particularly strong for firms more exposed to both external and internal governance mechanisms, firms for which firm-specific knowledge is relatively unimportant, and during periods of extreme abnormal stock performance. Our results suggest that firms with more informative stock prices have less demanding board structures.

Keywords: Corporate boards, Independent directors, Price informativeness, Monitoring

JEL Classification: G32, G34