Board Independence and Corporate Investments
46 Pages Posted: 27 Jan 2015 Last revised: 19 May 2015
Date Written: November 20, 2014
This research investigates whether and how board independence influences corporate investment decisions in a Seemingly Unrelated Regression (SUR) framework, where the capital investment and the research and development (R&D) investment are examined simultaneously. We argue that the free cash flow problem primarily inflicts capital investments, while the managerial conservatism mainly undercuts the more risky R&D investments. Consistent with independent board mitigating both agency problems, we find that firms with a higher degree of board independence is negatively associated with capital investments but positively associated with R&D investments, after controlling for common determinants of investments. We address the endogeneity of board independence by exploiting an exogenous change in board structure brought about by the Sarbanes-Oxley Act (SOX) and continue to find consistent results.
Keywords: Capital investment; R&D investment; agency problem; board independence; SUR
JEL Classification: G30, G31, G32
Suggested Citation: Suggested Citation