Do Independent Directors Cause Improvements in Firm Transparency?

54 Pages Posted: 1 Apr 2012 Last revised: 27 Aug 2013

Chris Armstrong

University of Pennsylvania - Accounting Department

John E. Core

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Wayne R. Guay

University of Pennsylvania - Accounting Department

Date Written: August 14, 2013

Abstract

Recent research finds that firms characterized by high corporate transparency have a greater proportion of independent directors. The direction of 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 determined by exogenous variation in the information environment. Another branch 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 management disclosure and financial intermediation changed at firms affected by this shock. We also examine the lead/lag relation between changes in board structure and changes in corporate transparency, as well as whether these effects vary as a function of management entrenchment, information processing costs, and when changes to audit committee independence are required. Our results suggest that corporate transparency can be altered to suit the informational demands of a particular board structure.

Suggested Citation

Armstrong, Chris and Core, John E. and Guay, Wayne R., Do Independent Directors Cause Improvements in Firm Transparency? (August 14, 2013). Available at SSRN: https://ssrn.com/abstract=2031801 or http://dx.doi.org/10.2139/ssrn.2031801

Chris S. Armstrong

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

John E. Core (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

77 Massachusetts Ave.
E62-416
Cambridge, MA 02138
United States

Wayne R. Guay

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
1329 Steinberg-Dietrich Hall
Philadelphia, PA 19104-6365
United States
215-898-7775 (Phone)
215-573-2054 (Fax)

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