Real Effects of Board Reforms: International Evidence

Prior studies show that country-level board reforms, aimed at enhancing independence, positively affect firm value, but the channels remain unclear. This paper investigates improved corporate financing and investment as a channel. Using an estimation method robust to heterogeneous treatment effects, we find that board reforms increase external financing and investment, suggesting that they enhance investors' confidence about board oversight and willingness to provide capital. Subsample analyses reveal conditions where reforms are more effective. First, the positive impact on external financing is driven by comply-or-explain reforms vis-a-vis rule-based reforms. This indicates that flexible reforms work better and that strict board reforms disrupt optimally designed board structures. Second, financially constrained firms benefit more, reinforcing the role of reforms in raising investor capital provision. Finally, we document a complementary relation between board reforms and country-level investor protection and legal enforceability, underscoring the role of high-quality institutions in enhancing the effectiveness of board reforms.