Strive towards investment efficiency among Egyptian companies: Do board characteristics and information asymmetry matter?

Abstract

This study examines the impact of the board of directors (BoD) characteristics, namely BoD independence, compensation, leadership, and CEO career concerns on investment efficiency, using information asymmetry as a mediator. Using a sample of 326 firm‐year observations of non‐financial firms listed in the EGX 100 Index of the Egyptian stock market from 2014 to 2018, we find that board independence, board compensation, and board leadership are negatively associated with inefficient investment and information asymmetry, whereas the opposite is true for CEO career concerns. Furthermore, a positive relationship between information asymmetry and inefficient investment is documented. Finally, we find that information asymmetry mediates the relationship between the three BoD characteristics (i.e., board independence, leadership, and compensation) and inefficient investment. Conversely, it does not interfere with the relationship between CEO career concerns and inefficient investment. These findings are consistent in both under‐investment and over‐investment scenarios and across the pooled sample. Our findings contribute to corporate governance and investment literature by addressing new relationships, providing empirical evidence from a one‐tier board model in developing countries, and offering a useful explanation for the inconsistent results in prior studies. These findings help regulators, investors, and policymakers realize the importance of BoD characteristics in mitigating information asymmetry and improving corporate investment efficiency.

Corporate governance and investment efficiency in Indonesia: the moderating role of industry competition

“…In the former, the management either chooses an investment model with a negative NPV or invests more than the optimal level, while in the latter, the management lets go investment projects with a positive NPV value or invest less than the optimal value (Biddle et al , 2009; Ullah et al , 2020). There are various approaches to explaining inefficient investment, namely, the agency theory, management entrenchment, free cash flow, overconfidence and the upper echelons approach (Lei and Chen, 2019; Ullah et al , 2020; Menshawy et al , 2021).…”

“…The information friction can then happen between agents, who usually hold more information about the company's financial condition and principals, who usually have limited information. Such a situation can fuel moral hazard and cause adverse selection, resulting in ineffective investment (Biddle and Hilary, 2006; Gomariz and Ballesta, 2014; Du et al , 2018; Menshawy et al , 2021). The term moral hazard pertains to opportunistic behaviours of the management (Jensen and Meckling, 1976), while adverse selection is a situation where the management uses information asymmetry to use the company resources to satisfy their interests (Biddle and Hilary, 2006; Menshawy et al , 2021).…”

“…Conversely, an investment is said to be ineffective when there is either overinvestment or underinvestment, referring to an investment which exceeds or falls short of the optimal value, respectively (Biddle et al , 2009; Ullah et al , 2020). Investment inefficiency can be explained through various approaches, such as agency theory, free cash flow, excessive trust, entrenchment management and upper echelons (Lei and Chen, 2019; Ullah et al , 2020; Menshawy et al , 2021). The present study specifically follows the agency theory to scrutinize the findings.…”

“…According to the agency theory, an inefficient investment may result from the moral hazard and adverse selection attributed to agency conflicts which emerge due to information asymmetry (Ullah et al , 2020; Menshawy et al , 2021). It is suggested that the management while possessing extensive information on the actual value of investments, might instead take advantage of the information asymmetry to select investments that benefit the management at the expense of the shareholder’s or principal’s interests (Suman and Singh, 2020).…”

Sustainable Corporate Governance: The Impact Factors for Top Consulting Engineering Companies in Taiwan

“…Usually, the capital structure varies depending on the characteristics of the industry and their approaches. The consequence of this indicates that all the aforementioned factors may have an effect on a board of directors [12][13][14][15][16][17][18] (Hypotheses 6-8).…”