Cost of Information Acquisition and Board Independence: Evidence From a Change in Accounting Standard

Abstract

Independent directors are valuable because they do not suffer from the agency costs that afflict executive directors. Independent directors also operate at an informational disadvantage compared with executive directors, which makes it hard for them to carry out their duties of advising and monitoring, and thus affects their value. I test the impact of the cost of information acquisition on board structure by exploiting a change in an accounting standard that forced US public firms to be more transparent about their operations. Analysts’ forecasts subsequently became more precise and less dispersed for the firms more affected, suggesting that the cost of information acquisition has decreased. Consistent with independent directors’ greater value, I document an increase in appointed independent directors. Cross-sectional tests suggest that independent directors are more valuable because of their improved monitoring capacity, as opposed to their advising capacity. Robustness tests using alternative data sources do not confirm the findings. Implications are discussed.