Board Independence and Corporate Investments

46 Pages Posted: 27 Jan 2015 Last revised: 19 May 2015

See all articles by Jun Lu

Jun Lu

Central University of Finance and Economics (CUFE)

Wei Wang

Cleveland State University

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

Lu, Jun and Wang, Wei, Board Independence and Corporate Investments (November 20, 2014). Lu, J. and W. Wang, 2015, Board independence and corporate investments, Review of Financial Economics 24, 52-64. Available at SSRN: or

Jun Lu

Central University of Finance and Economics (CUFE) ( email )

Beijing, Beijing

Wei Wang (Contact Author)

Cleveland State University ( email )

Cleveland, OH 44115
United States

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