The effects of board independence on busy directors and firm value: Evidence from regulatory changes in Sweden

摘要

Research Question/Issue This paper examines the impact of changes in board independence on the market valuation of Swedish firms. I exploit an exogenous change to the rules of corporate governance in 2005, which requires large firms to have majority independent boards, as a quasi-experimental setting. Research Findings/Insights I use a regression discontinuity design and a difference-in-differences approach to capture the reaction of the market to the new governance rules, taking advantage of the fact that only large firms are required to comply with the code. The results indicate that (a) the market reacts negatively to the enactment of the new governance rules and (b) target firms that complied with the independence requirement witnessed larger decreases in their market valuation compared with the rest of the firms in the sample. The busyness of independent directors is a potential explanation for the estimated negative effect of the increased board independence on the market valuation of target firms. For instance, I find that independent directors in target firms experienced a larger increase in their busyness compared with their peers in nontarget firms. This increase in busyness is also more pronounced for independent directors of complying target firms. Theoretical/Academic Implications The findings of this paper are in line with theoretical models that find that imposing quotas on the number of independent directors might not be optimal for all firms. Practitioner/Policy Implications This paper identifies board busyness as an important consequence of requiring board independence in the Swedish context. The results of the paper have implications for corporate governance policies that impose quotas on board independence without limiting board busyness, especially when the supply of directors is limited.