Independent Director Reputation Incentives and Stock Price Informativeness

Abstract

We link the reputation incentives of independent directors to the informativeness of stock prices. We show that when more independent directors rank a directorship high, the firm-specific information content in a firm's stock price increases. Further, independent directors with high reputation incentives serve firms that voluntarily disclose more information and display lower crash risk. We find similar results when using plausibly exogenous shocks to the reputation incentives of independent directors. Our results therefore support a causal interpretation of the positive influence that independent directors with reputation incentives exert on corporate transparency.

Corporate governance and stock price crash risk: Evidence from Taiwan

“…This observation is consistent with that in other emerging markets, implying that institutional investors may not have sufficient supervision over the company. Furthermore, IND t accounts for 16.628% of the sampled companies, a proportion that is considerably lower than that (71.5%) reported by Sila, Gonzalez, and Hagendorff (2017), who focus on S&P 500 companies. The low proportion of independent directors signifies that most of the Taiwanese companies recruit independent directors with the aim of complying with laws rather than improving the effectiveness of CG.…”

Audit Committee Members’ Reputation Incentives and Their Effectiveness in Monitoring the Financial Reporting Process

“…Second, we contribute to the recent literature on the effects of independent directors' reputation incentives. Prior research documents how independent directors' reputation incentives impact firm performance, CEO turnover (Masulis and Mobbs, 2014), cost of borrowing (Huang et al, 2018), and share price informativeness (Sila et al, 2017). We extend this line of research to the audit committee level by showing how audit committee members' reputation incentives impact the committee's monitoring effectiveness over the financial reporting process.…”

“…be regarded as an effective monitor are higher in the independent director's most prominent directorship (Masulis and Mobbs, 2014;Sila et al, 2017;Huang et al, 2018). This is because prominent firms offer independent directors greater opportunities for reputation building and career development (e.g., Adams and Ferreira, 2008;Knyazeva et al, 2013).…”

“…We adopt two measures of audit committee members' reputation incentives. First, consistent with Masulis and Mobbs (2014), Sila et al (2017), and Huang et al (2018), we use the percentage of audit committee members for whom this audit committee membership is their highest ranked based on market capitalization as our first measure of audit committee members' varying reputation incentive effects. Various studies report results consistent with the notion that directorships in larger firms provide higher reputation incentives to directors (Shivdasani, 1993;Yermack, 2004;Ryan and Wiggins, 2004;Adams and Ferreira, 2008;Knyazeva et al, 2013).…”

“…Finally, our study contributes to a deeper understanding of the role of reputation in financial markets. Prior studies find that the actions of business professionals, such as financial analysts (Cowen et al, 2006;Clarke et al, 2007;Fang and Yasuda, 2009), investment bankers (Carter et al, 1998), auditors (Reynolds and Francis, 2001), independent directors (Masulis and Mobbs, 2014;Sila et al, 2017;Huang et al, 2018), and investors (Cao et al, 2015), are influenced by reputation concerns. Our study extends these studies to audit committee members and shows that their monitoring effectiveness is also influenced by the relative reputation value offered by their respective audit committee memberships.…”