Board independence and the efficiency of internal capital markets. (c2015)

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.