Document Type

Article

Publication Date

2-28-2018

Publication Title

Journal of Corporate Finance

Keywords

Innovation, Board Independence, Outside Director, Endogeneity, Difference-In-Difference, SOX

Disciplines

Business | Corporate Finance | Finance and Financial Management

Abstract

Using panel data on U.S. public firms, we document a positive effect of board independence on corporate innovation. This effect is concentrated in firms that are larger in size, in the non-technical industries, facing less product market competition, and using more debt, where managers are more likely to be excessively risk averse. We establish causality of board independence on innovation using a difference-in-difference approach that exploits an exogenous shock to board composition, namely, the mandate of a majority of outside directors on company boards by NYSE and NASDAQ in response to the passage of Sarbanes-Oxley Act in 2002. We further examine incentive compensation as a possible mechanism. We show that firms with more independent boards use more equity-based compensation, especially stock options, to promote managerial risk-taking.

DOI

10.1016/j.jcorpfin.2017.10.016

Version

Postprint

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

Volume

48

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