Estimating the Effect of Board Independence on Managerial Ownership Using a Quasi-Natural Experiment

16 Pages Posted: 4 Dec 2017

See all articles by Kridsda Nimmanunta

Kridsda Nimmanunta

NIDA Business School

Pornsit Jiraporn

Pennsylvania State University - School of Graduate Professional Studies (SGPS)

Date Written: November 29, 2017

Abstract

Grounded in agency theory, this paper investigates the effect of board independence on managerial ownership. We exploit the passage of the Sarbanes-Oxley Act and the associated exchange listing requirements as an exogenous regulatory shock that raises board independence. Our difference-in-difference (DID) estimates show that board independence leads to significantly higher managerial ownership. In particular, firms forced to raise board independence exhibit managerial ownership that is 26.35% higher, relative to firms not required to raise board independence. Thus, board independence and managerial equity ownership constitute governance mechanisms that act as complements, rather than substitutes. Our empirical strategy relies on a quasi-natural experiment and is far more likely to show a causal effect than what has been documented in the literature. Finally, an instrumental-variable analysis reinforces our conclusion.

Keywords: board independence, independent directors, managerial ownership, corporate governance, agency theory

JEL Classification: G30, G32, G34

Suggested Citation

Nimmanunta, Kridsda and Jiraporn, Pornsit, Estimating the Effect of Board Independence on Managerial Ownership Using a Quasi-Natural Experiment (November 29, 2017). Available at SSRN: https://ssrn.com/abstract=3079795 or http://dx.doi.org/10.2139/ssrn.3079795

Kridsda Nimmanunta

NIDA Business School ( email )

118 Moo3, Sereethai Rd.
Klong-Chan, Bangkapi
Bangkok, 10240
Thailand

Pornsit Jiraporn (Contact Author)

Pennsylvania State University - School of Graduate Professional Studies (SGPS) ( email )

30 E. Swedesford Road
Malvern, PA 19355
United States
(484) 753-3655 (Phone)

HOME PAGE: http://www.personal.psu.edu/pxj11/index1.html

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