Board Structure Mandates: Consequences for Director Location and Financial Reporting
Forthcoming in Management Science
48 Pages Posted: 31 May 2015 Last revised: 13 Feb 2017
Date Written: December 1, 2016
We examine how the director independence mandates of the Sarbanes-Oxley Act (SOX) and related reforms affected board geography and the quality of financial reporting. Using 1998-2006 data on the residential addresses of individual directors, we document that the geographic proximity to headquarters of audit committees and other monitoring committees declined upon implementation of the mandates. The decrease in proximity was especially large for those firms that were both SOX-noncompliant and supply-constrained in local director labor markets at the time the reforms were enacted. Moreover, firms with larger SOX-related losses of director proximity experienced significantly greater post-SOX declines in earnings quality. Our findings therefore suggest that, for some firms, the director independence mandates had unintended consequences for financial reporting quality.
Keywords: Board structure, Sarbanes-Oxley Act, geographic location, labor supply, monitoring, financial reporting
JEL Classification: G30, G31, G34
Suggested Citation: Suggested Citation