This post comes to us from Daniel Ferreira, Associate Professor of Finance at the London School of Economics, Miguel Ferreira, Associate Professor of Finance at the Universidade Nova de Lisboa, and Clara Raposo, Professor of Finance at Instituto Superior de Economia a Gestao.
In our paper, Board Structure and Price Informativeness, forthcoming in the Journal of Financial Economics, we theoretically and empirically identify important interactions between internal and external governance mechanisms. We find evidence that stock market monitoring is a substitute for board monitoring. The strength of this relation is influenced by other governance mechanisms such as pay-performance sensitivity and the market for corporate control.
We add a new element to the list of determinants of board structure – price informativeness. We find robust empirical evidence that stock price informativeness is negatively related to board independence. The correlation between price informativeness and board independence is as strong as the ones between board independence and other firm-level variables that have been documented in the literature on corporate boards. Given our long list of control variables and the use of fixed-effects methods, it is unlikely that price informativeness is capturing the effects of omitted variables.