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Is Board Structure One-Size-Fits-All? The Unintended Informational Consequence of the Sarbanes-Oxley Act

51 Pages Posted: 25 Mar 2008 Last revised: 14 May 2014

Huijing Fu

Texas Christian University

Xiaoyun Yu

Indiana University - Kelley School of Business - Department of Finance; China Academy of Financial Research (CAFR)

Date Written: August 8, 2010

Abstract

In this paper we examine how board structure affects the informativeness of board members by comparing the returns earned by officers and independent directors from purchasing the firm’s shares. We investigate whether an exogenous shock to the board structure—the 2002 Sarbanes-Oxley Act and related exchange mandates (the SOX)—leads to a shift in information asymmetry between officers and independent directors. We document a rise in information asymmetry among firms whose boards were previously dominated by insiders, and whose board independence was more likely to be affected by the SOX: An increase in board independence is followed by a significantly larger difference in buy-and-hold returns between officers and existing independent directors. Outsiders joining the board post SOX earn even lower returns than existing independent directors. The increase in information asymmetry for these firms prevails over to independent directors serving a crucial role of board function such as the audit committee.

Keywords: Sarbanes-Oxley Act, information asymmetry, insider trading, board structure and composition, directors, corporate governance

JEL Classification: G34, D82, G14, G38, G32

Suggested Citation

Fu, Huijing and Yu, Xiaoyun, Is Board Structure One-Size-Fits-All? The Unintended Informational Consequence of the Sarbanes-Oxley Act (August 8, 2010). Available at SSRN: https://ssrn.com/abstract=1107676 or http://dx.doi.org/10.2139/ssrn.1107676

Huijing Fu (Contact Author)

Texas Christian University ( email )

Fort Worth, TX 76129
United States
817-257-7148 (Phone)
817-257-7227 (Fax)

Xiaoyun Yu

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3521 (Phone)
812-855-5875 (Fax)

China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030
China

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