Environmental Jolts, Board Governance Practices and Firm Value: Evidence from the 2008 Financial Crisis

Abstract

Environmental jolts are temporary disruptions that cause a hostile transformation in the level of resources available in a given system. Using the 2008 financial crisis as a moderator factor in the relationship between board structure and firm value, we assess if there is any change in board governance practices as a result of firms adaptation to the changes caused by the jolt. Our data is composed by 101 Spanish publicly traded firms for the period between 2003 and 2010. The Spanish governance system shares many characteristics with the systems holding in other Western European countries. Therefore this study contributes to the literature on governance practices and its impact on firm performance in Europe. We use dynamic panel data methodology and instruments to control for the problems of endogeneity and heteroskedasticity. Our results show that boards do change to adapt to this new reality where resources are scarce and growth opportunities are scant. During the crisis period, the optimal board size increases by two members, the presence of independent directors prevent firms from increasing financial leverage and managers get entrenched at higher levels of board ownership. This study has useful implications for practitioners as it shows the positive impact of the adoption of best board governance practices on firm value in times of munificence and during environmental jolts.