Board Structure and Price Informativeness

Daniel Ferreira, Miguel A. Ferreira and Clara C. Raposo

No 2008-4, CEI Working Paper Series from Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University

Abstract: We develop and test the hypothesis that private information incorporated into stock prices affects the structure of corporate boards. Stock price informativeness may be a complement to board monitoring, because the information revealed by prices can be used by directors to monitor management. But price informativeness may also be a substitute for board monitoring, because more informative prices can trigger external monitoring mechanisms, such as takeovers. We find robust evidence for the substitution effect: Stock price informativeness, as measured by the probability of informed trading (PIN), is negatively related to board independence. Consistent with the model's predictions, this relationship is particularly strong for firms exposed to external governance mechanisms and internal governance mechanisms, and firms for which firm-specific knowledge is relatively unimportant. We address endogeneity concerns in a number of different ways and conclude that our results are unlikely to be driven by omitted variables or reverse causality. The results are also robust to using different measures of price informativeness and different proxies for board monitoring

Keywords: Corporate boards; Independent directors; Price informativeness (search for similar items in EconPapers)
JEL-codes: G32 G34 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2008-04
New Economics Papers: this item is included in nep-bec, nep-cfn, nep-cta and nep-mst
Note: This Version: February 2008
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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