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The effectiveness of board independence in high-discretion firms

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  • James, Hui Liang
  • Borah, Nilakshi
  • Lirely, Roger

Abstract

We examine the impact of managerial discretion on the independence of firms’ boards and firm performance for the period 1998-2013. We find that high-discretion firms, generally characterized by high product differentiability, high market growth, and a wider array of potential courses of action available to executives, have a smaller percentage of independent directors and a lower likelihood of CEO-chairman duality. Furthermore, firm performance is inversely related to board independence in high-discretion firms, and the negative effect is greater when they are associated with a high cost of acquiring information. Our findings indicate that a uniform “one-size-fits-all” reform of corporate boards may impair board effectiveness in some types of firms.

Suggested Citation

  • James, Hui Liang & Borah, Nilakshi & Lirely, Roger, 2022. "The effectiveness of board independence in high-discretion firms," The Quarterly Review of Economics and Finance, Elsevier, vol. 85(C), pages 103-117.
    • Handle: RePEc:eee:quaeco:v:85:y:2022:i:c:p:103-117
    DOI: 10.1016/j.qref.2020.10.021
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    More about this item

    Keywords

    Board composition; Leadership structure; Managerial discretion; Firm performance;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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