The role of directors: unravelling the effects of boards on corporate outcomes

Abstract

Purpose The purpose of this paper is to analyse whether the theoretical relationship between the board composition and the cost of capital (CC) is mediated by risk disclosure (RD) practices. Design/methodology/approach Partial least squares techniques are used, and a sample of all the companies belonging to manufacturing industry listed on Standard and Poor’s 500 for the year 2009 is studied. In relation to board composition, several recommendations issued by US governance codes are considered: board independence, board size, CEO duality, gender diversity, ethnic diversity, and financial expertise. Content analysis techniques are employed to measure RDs. Findings The results show that boards that follow governance codes recommendations lead to a reduction in the CC through the disclosure of information on risks. Research limitations/implications These results provide encouraging opportunities for future research about the real role of the board of directors and suggest the need for the analysis of the participation of directors in firm strategy to better understand the effect of boards on the corporate outcome. Practical implications This evidence must help regulators and owners to set up adequate corporate governance mechanisms regarding the composition of boards. This evidence also presents direct implications for managers, who can better understand the value-relevance of RDs. Originality/value This paper provides new insight into the literature, which highlights that the effect of boards of directors on firm outcomes must be mediated by the involvement of boards in specific strategies.

Do board characteristics play a moderating role in M&A decisions of family firms?

“…The board serves the significant role of monitoring on behalf of shareholders, can affect corporate outcomes (Bravo et al, 2018;Stiles, 2001) and also serves as an advisory body which contributes resources and expertise otherwise absent in an organization (Baysinger and Butler, 1985;Dalton et al, 1999). Therefore, whether the origin of aversion toward M&A transactions is in type-II agency problems or it is on account of lack of expertise and resources, we hypothesize that certain characteristics of the board can help mitigate the aversion.…”

Does compliance with corporate governance codes help to mitigate financial distress?

“…For instance, the likelihood of corporate failure has been negatively associated with ownership concentration and state ownership (Li et al, 2008), with institutional ownership (Manzaneque et al, 2016b;Udin et al, 2017) and with board ownership (Abdullah, 2006). Although the majority of these studies have used corporate governance characteristics individually, the recent literature also calls for the need to employ composite measures, which aggregates a number of governance indicators considering the interaction between multiple corporate governance mechanisms, to provide a better overview of the effectiveness of corporate governance structures (Brown et al, 2011;Jain and Jamali, 2016;Bravo et al, 2018). Consistent with this approach, our paper focuses on aggregated measures about the compliance of CGC recommendations to examine the effects of corporate governance on firms` financial distress.…”

The effect of female presence on corporate boards of directors on the value relevance of accounting amounts: empirical evidence from the European Union

“…Second, in addition to the effect of ethical reputation on value relevance produced by female presence on corporate boards, Bravo et al. (2018) argued that such presence reduces the cost of capital and increases value relevance. Focusing on manufacturing industries listed on Standard and Poor's 500 for 2009, they found that boards with a high female presence, following the governance code's recommendations, lead to a reduction in the cost of capital through the disclosure of information on risks.…”

“…The table should suggest that female presence is only one of the variables that might be included in the so-called other information and that studies on the relationship between female presence and value relevance have provided very limited evidence about its ability to affect the weight investors place on earnings and book value. Second, in addition to the effect of ethical reputation on value relevance produced by female presence on corporate boards, Bravo et al (2018) argued that such presence reduces the cost of capital and increases value relevance. Focusing on manufacturing industries listed on Standard and Poor's 500 for 2009, they found that boards with a high female presence, following the governance code's recommendations, lead to a reduction in the cost of capital through the disclosure of information on risks.…”