Board of Directors and Exchange Requirements: Operating Performance of Traditionally Insider Controlled Boards
Posted: 3 Nov 2015
Date Written: November 2, 2015
The main objective of this research is to examine the operating performance of the companies whose boards have been traditionally controlled by the insiders (insiders and/or affiliated insiders comprising more than 50% of the board membership) and whose boards now include majority of outsiders as required by law and exchange requirements. If, as suggested by Jensen & Meckling (1976) and others, having majority of outsiders on the board will lead to reduce agency costs between shareholders and managers, then the operating performance of the company is likely to improve as a result of the new requirements. On the other hand, as theorized by Harris & Raviv (2008), if insiders bring more firm specific knowledge to the board and thus help increase the shareholder value, we should expect a negative relationship between board independence and operating performance. The results presented here suggest that there is no statistical difference in the firm performance over a period of three years after the passage of the regulations requiring board independence.
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