Are All Outside Directors Created Equal With Respect to Firm Disclosure Policy?

Abstract

Empirical evidence on the association between outside directors and firms’ voluntary disclosures is mixed and controversial. We hypothesize that the outside directors do not represent a homogeneous group of people as considered in the literature. Using hand-collected data from a sample of biotechnology firms, we find that the aforesaid association differs based on the directors’ professional backgrounds. Our results are consistent with two ideas. First, an outside director’s influence on firm disclosure policy is shaped by her professional background. Second, firms match outside directors’ professional backgrounds with their disclosure policy. We cannot distinguish between the two explanations. Yet, we make an important contribution to the literature. We show that the impact and the selection prospects of outside directors are not as uniform as previously considered in the literature. Thus, the researchers examining financial disclosures must take into account the background characteristics of all outside directors, not just of those in the audit committee. And investor bodies must consider the background characteristics of candidates in their recommendation for outside-director selection.

Keywords: Biotechnology firms, Corporate governance, Voluntary disclosures, Proprietary costs, Outside directors

JEL Classification: M40, M41, G14, G32, G34