Cost of information acquisition and board independence: Evidence from a change in an accounting standard

49 Pages Posted: 10 Apr 2020 Last revised: 3 Jun 2020

Date Written: March 23, 2020

Abstract

Independent directors are valuable because they do not suffer from the agency costs
that afflict executive directors. Independent directors also operate at an informational
disadvantage compared with executive directors, which makes it hard for them to carry
out their duties of advising and monitoring, and thus affects their value. I test the
impact of the cost of information acquisition on board structure by exploiting a change in
an accounting standard that forced US public firms to be more transparent about their
operations. Analysts’ forecasts subsequently became more precise and less dispersed
for the firms more affected, suggesting that the cost of information acquisition has
decreased. Consistent with independent directors’ greater value, I document an increase
in appointed independent directors. Cross-sectional tests suggest that independent
directors are more valuable because of their improved monitoring capacity, as opposed to
their advising capacity. Robustness tests using alternative data sources do not confirm
the findings. Implications are discussed.

Keywords: board independence, cost of information acquisition, accounting standard change

JEL Classification: G34, G38, G14

Suggested Citation

Allegrucci, Alberto, Cost of information acquisition and board independence: Evidence from a change in an accounting standard (March 23, 2020). Available at SSRN: https://ssrn.com/abstract=3559505 or http://dx.doi.org/10.2139/ssrn.3559505

Alberto Allegrucci (Contact Author)

Stockholm School of Economics ( email )

PO Box 6501
Stockholm, 11383
Sweden

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