Firm Performance and Board Committee Structure

April Klein

1,774 citations0/0 files storedThe Journal of Law and Economics

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Corporate Finance and Governance Gender Diversity and Inequality Corporate Governance and Financial Management

Abstract

This article demonstrates a linkage between firm performance and board composition by examining the committee structure of boards and the directors' roles within these committees. Consistent with previous studies, I find little association between firm performance and overall board composition. However, by going into the inner workings of the board via board committee composition, I am able to find significant ties between firm performance and how boards are structured. First, a positive relation is found between the percentage of inside directors on finance and investment committees and accounting and stock market performance measures. Next, firms significantly increasing inside director representation on these two committees experience significantly higher contemporaneous stock returns and return on investments than firms decreasing the percentage of inside directors on these committees. These findings are consistent with Fama and Jensen's assertion that inside directors provide valuable information to boards about the firms' long‐term investment decisions.

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References

1983Separation of Ownership and Control 1980Agency Problems and the Theory of the Firm 1993The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems 1988Management ownership and market valuation 1996Higher market valuation of companies with a small board of directors 1990Additional evidence on equity ownership and corporate value 1996Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders 1981Risk Reduction as a Managerial Motive for Conglomerate Mergers

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2002Audit committee, board of director characteristics, and earnings management 2007Boards: Does one size fit all☆2012Endogeneity and the dynamics of internal corporate governance 2003Earnings management and corporate governance: the role of the board and the audit committee 2001Boards of Directors as an Endogenously Determined Institution: A Survey of the Economic Literature 2007

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