Board structure and monitoring effects in different institutional settings: a comparison between Italy and the UK

Abstract

This paper analyses how investor protection provided by the institutional setting in which a firm operates affects the quality of its board of directors. It also investigates whether firms operating in contexts with weaker investor protection rely more on internal corporate governance to prevent dysfunctional behaviour by insiders. This is achieved by the analysis of a matched pair sample of firms listed on the Italian and the UK stock markets. The results indicate that the board composition and structure are of higher quality in the UK. Our findings also suggest that the effectiveness of a boards' monitoring, measured by its ability to mitigate earnings management, is stronger in Italy. Thus, in a context where the institutional setting provides less investor protection, firm-level governance can substitute for the institutional deficit.

Corporate governance practices and comprehensive income

“…The null hypothesis could not be rejected at a significance level of 10 per cent (p-value = 0.077), so the level of corporate governance culture has a positive impact on firm performance as measured by CI value. These results are in line with previous studies that have used other corporate governance indexes to obtain significant and positive values (Beiner et al, 2006;Brown and Caylor, 2006;Campa and Donnelly, 2013;Gompers et al, 2003;Klapper and Love, 2004;and among others). The control variable, the market value, a measurement of firm value, is positive and significant (0.000 p-value).…”

“…When analysing the corporate governance variables of the index separately, our results indicate that the median of the board size, the variable that is most frequently used in the literature to measure the effectiveness of corporate governance (Huse, 2000), has 10.63 members. In our research, the ideal number of directors is found to be between 8 and 12; our results are thus in line with the ranges determined in other studies, such as those of Campa andDonnelly (2013), Jensen (1993) and Lipton and Lorsch (1992) and among others. The percentage of outside directors, considered to be "the crucial corporate governance mechanism for monitoring managers" , has a significant relationship to board size, as was the case in other studies (i.e.…”

“…The fact that the sample firms are listed on the S&P 500 index is likely a guarantee of high levels of corporate governance. Other studies use different corporate governance variables in the index, but all of them obtain the same results: higher values on corporate governance indexes (Beiner et al, 2006;Brown and Caylor, 2006;Campa and Donnelly, 2013;Gompers et al, 2003;Klapper and Love, 2004;and among others).…”

“…Following previous studies, we focus on aggregating corporate governance variables in an index (Beiner et al, 2006;Brown and Caylor, 2006;Campa and Donnelly, 2013;Gompers et al, 2003;Klapper and Love, 2004;and others).…”

“…As control variables, we use market value, sales, leverage and year dummies, as in previous studies (Beiner et al, 2006;Brown and Caylor, 2006;Campa and Donnelly, 2013;Klapper and Love, 2004;and among others). We expect control variables to have a positive effect related to size (market value and sales) because previous studies indicate that the larger the company, the greater its profitability (Beiner et al, 2006;Brown and Caylor, 2006;Klapper and Love, 2004).…”