Is Board Structure One-Size-Fits-All? The Unintended Informational Consequence of the Sarbanes-Oxley Act

Abstract

In this paper we examine how board structure affects the informativeness of board members by comparing the returns earned by officers and independent directors from purchasing the firm’s shares. We investigate whether an exogenous shock to the board structure—the 2002 Sarbanes-Oxley Act and related exchange mandates (the SOX)—leads to a shift in information asymmetry between officers and independent directors. We document a rise in information asymmetry among firms whose boards were previously dominated by insiders, and whose board independence was more likely to be affected by the SOX: An increase in board independence is followed by a significantly larger difference in buy-and-hold returns between officers and existing independent directors. Outsiders joining the board post SOX earn even lower returns than existing independent directors. The increase in information asymmetry for these firms prevails over to independent directors serving a crucial role of board function such as the audit committee.