Board Structure and the Volatility of Volatility

Abstract

Using the NYSE/NASDAQ listing rule changes to establish causality, we are the first to empirically show that board structure can significantly reduce the volatility of volatility of stock returns, which can be a consequence of erratic decision-making. The effect is moderated by firm characteristics such as size and fundamental risk. Furthermore, reduced fluctuations in investments, cash holdings, and leverage suggest that this results from improved policy consistency. We also find significantly higher stock returns after the change, but only for firms in stable industries, not dynamic ones. This suggests that not all firms benefit from the mandated new board structures.

Keywords: Corporate Governance, SOX, Listing Rules, Volatility of Volatility, Board Independence

JEL Classification: G31, G34, M12