The Changing Dynamics of Board Independence: A Copula Based Quantile Regression Approach

Jong Min Kim ,Chulhee Jun,Won Yong Kim,Chan Ho Cho

doi:10.3390/jrfm13110254

Abstract

This paper examines the effect of board characteristics, especially board independence, on firm performance from a dynamic perspective through copula-based quantile regression approaches, which allow us to focus on changes at different points in the distribution of board characteristics. We find that the effect of board independence on Tobin’s Q, a proxy of firm value, is negatively associated with firm value, using ordinary least squares (OLS) regression. This negative effect using the conditional mean of the firm value does not hold across the conditional quantiles of the distribution of Tobin’s Q, and this finding is still held under both the linear and the nonlinear quantile regressions. We even lessen the assumption of distributions of multivariate board variables by employing parametric copula-based quantile regressions as well as nonparametric ones. The results support our findings. Our results suggest that estimating the quantile effect of board variables on firm value can provide more meaningful insight than just examining the conditional mean effect.

Highlights

A considerable body of work examines the association between board characteristics and aspects of firm structure, corporate conduct, or firm value in terms of the causal relationship by using the mean linear regression method
Pellegrini and Sironi (2017) investigate whether companies who switched to a one-tier board corporate governance system had a lower performance for a sample of unlisted Italian joint-stock companies, and they find that the adoption of a one-tier model of corporate governance between 2003 and 2013 negatively affected firm’s performances measured by return on equity (ROE), return on assets (ROA), and revenues from sales
A common approach in this field is to include a certain type of board characteristic as well as factors associated with firm value

Summary

Introduction

A considerable body of work examines the association between board characteristics and aspects of firm structure (e.g., governance characteristics), corporate conduct (specific events or decisions), or firm value (performance) in terms of the causal relationship by using the mean linear regression method. The objective of these studies is to deliver overall insights into which aspects of board governance matter for firm performance. Bhagat and Black (2001) examine the causal relationship between the degree of board independence and the variability of long-term firm performance. Using board composition data of 957 large U.S public corporations, they find no evidence that greater board independence leads to improved firm performance. Ding et al (2020) find that the stock prices of firms with anti-takeover devices fall faster during this period, implying that the market reacts differently based on governance structure

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