Director Independence and Corporate Investment Efficiency: Evidence from Board Reforms Worldwide

Abstract

This paper investigates the effect of major board independence reforms on corporate investment efficiency using a large sample of firms from 30 countries. We find evidence of a significant reduction in over-investment subsequent to initiation of board reforms. This reduction is most effective (1) in countries with rule-based reforms and higher liability standards and (2) in firms with lower insider ownership and higher analyst coverage. We also find stronger reductions in over-investment among firms most affected by board reforms – firms that did not have majority board independence at the time of reform. Furthermore, we provide evidence that firms have lower deviations from the level of expected investments following board reforms. Our evidence is consistent with major country-level board reforms that increase the percentage of independent directors enhancing investment efficiency through the mitigation of the moral hazard problem for over-investing firms.