Abstract:
This paper focuses on the effect of increased board independence on the efficiency of internal capital markets in diversified firms. We find that the increase in board independence post-SOX may have moved firms away from their optimal board structure. Our results suggest that, relative to the pre-SOX period, increased board independence post-SOX had a negative effect on diversified firms’ excess value and internal capital market efficiency. This suggests that firms may not have benefited from the move towards higher independence in the post-SOX era. Mutual back scratching and socialization within the firm may explain the ineffectiveness and inefficiency of increased board independence in diversified firms.
