The board effectiveness index and stock price crash risk

Abstract

PurposeThe main purpose of this study is to use a new broad board effectiveness index, which has been created from several internal attributes of board of directors and to investigate the association of the overall index regarding stock price crash risk.Design/methodology/approachThe authors create a new board effectiveness index from a comprehensive set of board attributes, including the number of board meetings, the number of board attendances, the expertise of the directors, the size of the board and the number of independent directors, in order to test with the stock price crash risk by using panel regression models with fixed effects. The two-stage least squared regression ensures endogeneity issues.FindingsAn increase in board effectiveness index lowers firm-specific crash risk. Moreover, female directors enhance the board effectiveness.Originality/valueWith a new broad board effectiveness index, this paper is unique from other studies as the authors focus on the overall index rather than on a single dimension of board attributes.