Effects of professional and non-professional investors’ perceptions of board effectiveness on their judgments: An experimental study

Abstract

This paper investigates the effects of investors’ perceptions of the effectiveness of the board of directors on their judgments. I hypothesize that investors’ perceptions of the effectiveness of the board will be negatively related to their judgments of investment risk and positively related to the amount they are willing to invest. I also hypothesize that the association between effectiveness of the board and investment judgments will be moderated by investor type such that professional investors will be less conservative than non-professional investors. Forty non-professional investors and 33 professional investors participated in the experiment. Generally, the results of the study are consistent with the hypothesized effects. The results suggest that even in the context of sound financial performance, investors’ perceptions of the effectiveness of the board are a key determinant of their investment judgments. This association is moderated by investor type and suggests professional investors are less conservative than non-professional investors. Such evidence is consistent with agency theory, “use of the house money” hypothesis and recent anecdotal scandals involving professional investors. Overall, the results provide evidence that investors are more confident in firms with effective corporate boards and support regulatory reforms strengthening corporate boards.