Journal of Corporate Finance
Innovation, Board Independence, Outside Director, Endogeneity, Difference-In-Difference, SOX
Business | Corporate Finance | Finance and Financial Management
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.
Lu, Jun and Wang, Wei, "Managerial conservatism, board independence and corporate innovation" (2018). Business Faculty Publications. 284.
NOTICE: this is the author’s version of a work that was accepted for publication in . Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Corporate Finance, 48, (2018), doi:10.1016/j.jcorpfin.2017.10.016
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