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Board Independence And Corporate Investments
Review of Financial Economics
  • Jun Lu, Central University of Finance and Economics
  • Wei Wang, Cleveland State University
Document Type
Publication Date
  • capital investment; R&D investment; agency problem; board independence; Sarbenes-Oxley Act; seemingly unrelated regression

This research investigates whether and how board independence influences corporate investment decisions in a Seemingly Unrelated Regression (SUR) framework,where the capital investment and the research and development (R&D) investment are examined simultaneously. We argue that the free cash flow problem primarily inflicts capital investments, while the managerial conservatism mainly undercuts the more risky R&D investments. Consistent with independent board mitigating both agency problems, we find that firms with a higher degree of board independence is negatively associated with capital investments but positively associated with R&D investments, after controlling for common determinants of investments. We address the endogeneity of board independence by exploiting an exogenous change in board structure brought about by the Sarbanes– Oxley Act (SOX) and continue to find consistent results.

Citation Information
Lu, J. & Wang, W. (2015). Board independence and corproate investments. Review of Financial Economics, 24, 52-64. doi: 10.1016/j.rfe.2015.01.001