Firms' Information Environments and Board Independence

41 Pages Posted: 26 Apr 2006

See all articles by Peter B. Vassallo

Peter B. Vassallo

University of New South Wales (UNSW) - School of Accounting

Peter Alfred Wells

University of Technology Sydney, Accounting Discipline Group ; Financial Research Network (FIRN)

Date Written: April 20, 2006

Abstract

A feature of recent regulatory developments, such as CLERP 9 in Australia and Sarbannes Oxley in the United States, is that they prescribe uniform governance mechanisms for all firms, a 'one size fits all' approach. However, there is scant empirical evidence of whether this is efficient, and in the extant empirical literature there is only equivocal guidance on the more general question of how firm characteristics impact the selection of governance mechanisms. Addressing, at least in part this issue, this study evaluates the impact of the firms' information environment and the ability of accounting information to capture this on the demand for independent boards of directors as a governance mechanism. Price to book (P/B) and price to earnings (P/E) are used to evaluate the firms' information environment and the extent to which it is captured by accounting information. Evidence is provided of joint P/B, P/E firm classification capturing significant differences in board independence across firms. Importantly, supplementing P/B with P/E identifies significant differences in board independence within high and low P/B firms. Furthermore, evidence is provided of a strong, positive correlation between board size and board independence suggesting that independent directors are added to boards rather than used to supplant inside directors. This brings into question the appropriateness of regulation uniformly prescribing corporate governance mechanisms.

Keywords: Corporate Governance, Directors

JEL Classification: G30, M40

Suggested Citation

Vassallo, Peter B. and Wells, Peter Alfred, Firms' Information Environments and Board Independence (April 20, 2006). Available at SSRN: https://ssrn.com/abstract=898065 or http://dx.doi.org/10.2139/ssrn.898065

Peter B. Vassallo (Contact Author)

University of New South Wales (UNSW) - School of Accounting ( email )

Room 3101, Level 3
Quadrangle Building
Sydney, NSW 2052
Australia

Peter Alfred Wells

University of Technology Sydney, Accounting Discipline Group ( email )

P.O. Box 123
Broadway NSW 2007
Australia
+61 (02) 9514 3628 / 3629 (Phone)
+61 (02) 9514 5515 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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