Board Governance and Investment Sensitivity to Stock Price: International Evidence

Abstract

This paper examines the effect of board governance on investment efficiency. I use the staggered enactment of board reforms in 41 countries as a shock to board structure that exogenously improves the quality of board oversight of managers. I find that investment–Q sensitivity improves by roughly half post-reform. This effect is more pronounced for firms that are more exposed to the reforms or when external governance mechanisms are less likely to discipline managers. These findings suggest that increased board oversight strengthens managers’ incentives to make investment decisions that are more in line with their firms’ growth opportunities.

Keywords: Board governance, Board reforms, Investment efficiency, Investment sensitivity to price

JEL Classification: G31, G34, G38