Board Structure and Price Informativeness

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 JEL classification: G32, G34 Keywords: Corporate boards, Independent directors, Price informativeness * We thank Carola Frydman, Jeffrey Gordon, Itay Goldstein, Antoine Faure-Grimaud, Pedro Santa-Clara, Antoinette Schoar, and Laura Starks; seminar participants at the City University of London, EBRD, LSE, Tilburg University, and University of Texas-Austin; and participants at the Lisbon-Sloan MIT corporate finance and governance workshop for helpful comments and suggestions.

The bright side of financial derivatives: Options trading and firm innovation

“…As Ferreira, Ferreira, and Raposo (2011) show, a disciplining takeover is more likely when prices are more efficient. Thus, an implication of our preceding discussion is that if managers prefer the quiet life, the beneficial effect of options should be stronger when managers are more "entrenched".…”

“…Foucault and Gehrig (2008) show that cross-listing enables firms to obtain more precise information on the value of their growth opportunities, which allows managers to make better investment decisions. Finally, Ferreira, Ferreira, and Raposo (2011) provide evidence that if prices are more efficient, the stock market is able to play a monitoring role that can reinforce internal and external monitoring mechanisms, although the sign of this relationship is ambiguous (i.e., they can interact as either complements or substitutes).…”

The role of information and financial reporting in corporate governance and debt contracting

“…Possibly as a result of these conflicting hypotheses, fail to find a significant relation between earnings timeliness and the proportion of outside directors. In related papers, Vafeas (2000) fails to find a significant relation between the proportion of outside directors and earnings informativeness, whereas Petra (2007) and Ferreira et al (2009) find a positive relation between the proportion of outside directors and earnings informativeness and accounting quality, respectively A manifestation of extreme distortion and lack of timeliness in financial reporting is the incidence of accounting fraud or accounting misstatements. In addition to distorting the information environment in which outside directors make decisions, accounting fraud and misstatements subject the firm to regulatory, litigation, and other costs (Karpoff, Lee, and Martin, 2008).…”

“…Williamson (1983) makes a similar argument, noting that the market for corporate control can act as a substitute for board (or internal) monitoring. Ferreira, Ferreira, and Raposo (2009) emphasize the role of the information environment in facilitating the substitution effect between the market for corporate control and board monitoring. They find that price informativeness, as measured by the probability of informed trade, is negatively associated with board independence, and that this result is stronger for firms that are more exposed to institutional investors and the market for corporate control.…”

Organizational complexity and corporate governance in major public companies in Brazil

“…Trata-se ainda de estudo descritivo, o qual consiste em avaliar e relatar as características de um determinado problema ou questão, estabelecendo-se relações entre as variáveis em foco. Quanto à abordagem da pesquisa, destaca-se a sua natureza quantitativa, já que os dados coletados são submetidos à análise estatística (COLLIS;HUSSEY, 2005 Para a mensuração da complexidade organizacional, fez-se uso das seguintes variáveis, já utilizadas nos estudos apresentados na revisão da literatura (BUSHMAN et al, 2004;BERRY et al, 2006;BOONE et al, 2007;COLES;DANIEL;NAVEEN, 2008;LIN;LEE, 2008;LINK;NETTER;YANG, 2008;FERREIRA;FERREIRA;RAPOSO, 2011;FARIAS, 2012 …”