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Board independence and corporate investments
Author(s) -
Lu Jun,
Wang Wei
Publication year - 2015
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1016/j.rfe.2015.01.001
Subject(s) - endogeneity , free cash flow , independence (probability theory) , monetary economics , cash flow , economics , conservatism , investment (military) , capital expenditure , business , accounting , finance , econometrics , political science , statistics , mathematics , politics , law
This research investigates whether and how board independence influences corporate investment decisions in a Seemingly Unrelated Regression (SUR) framework, where the capital investment and the research and development (R&D) investment are examined simultaneously. We argue that the free cash flow problem primarily inflicts capital investments, while the managerial conservatism mainly undercuts the more risky R&D investments. Consistent with independent board mitigating both agency problems, we find that firms with a higher degree of board independence is negatively associated with capital investments but positively associated with R&D investments, after controlling for common determinants of investments. We address the endogeneity of board independence by exploiting an exogenous change in board structure brought about by the Sarbanes–Oxley Act (SOX) and continue to find consistent results.