An Examination of the Characteristics of Boards of Directors, Regulation and Information Asymmetry

• In Event: Public Interest

Abstract

We investigate whether information asymmetry between managers and board of the directors increases with more independent directors on the board or more independent directors cause information asymmetry. The value of our contribution is that we develop a system of simultaneous equations to investigate the endogenous issue in the post-SOX period. To capture the interdependency, we use two-stage least square (2SLS) simultaneous equations. With this method, the coefficient of information asymmetry in the forward regression and the coefficient for board independence in the reverse regression isolate the effect of the relationship. We find that significantly higher information asymmetry, forecast error and forecast dispersion are associated with more independent boards. These findings indicate that analysts experience an increased lack of transparency when more independent directors are on the board. Furthermore, we identify a significant, reverse causal relationship between analyst following and board independence.

Authors

• Deborah Smith, Cleveland State University

• Pervaiz Alam, Kent State University

• Heidi H Meier, Cleveland State University