Managerial conservatism, board independence and corporate innovation
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Using panel data on U.S. public firms, we document a positive effect of board independence on corporate innovation. This effect is concentrated in firms that are larger in size, in the non-technical industries, facing less product market competition, and using more debt, where managers are more likely to be excessively risk averse. We establish causality of board independence on innovation using a difference-in-difference approach that exploits an exogenous shock to board composition, namely, the mandate of a majority of outside directors on company boards by NYSE and NASDAQ in response to the passage of Sarbanes-Oxley Act in 2002. We further examine incentive compensation as a possible mechanism. We show that firms with more independent boards use more equity-based compensation, especially stock options, to promote managerial risk-taking.
Subfields: Accounting
View Paper: https://www.semanticscholar.org/paper/c155dca2317e177f4a808e2cafee1dcea597a6e0
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Citations in the corpus
- Corporate governance reform and risk-taking: Evidence from a quasi-natural experiment in an emerging market (2020, background): “10 Second, as improved corporate monitoring lowers the magnitude and importance of the private benefits of insiders, CGR may discourage investment conservatism through independent board monitoring (Weisbach, 1988; Khanna and Palepu, 2000; Fauver et al., 2017; Lu and Wang, 2018).”