The Effect of Board Independence on the Information Environment and Information Asymmetry

Publication Type

Working Paper

Publication Date

11-2014

Abstract

Our paper examines how the independence of a firm’s board affects its information environment (in terms of earnings quality, management forecast frequency, and analyst coverage) and information asymmetry among investors. We show that greater board independence leads to higher earnings quality, greater management forecast frequency, and broader analyst coverage. We also show that these outcomes mediate the effect of board independence in reducing information asymmetry among investors in the equity markets. Of the three mediators, we find that analyst coverage is the most significant one; this suggests that analysts’ attraction to firms with board independence plays an important role in how board independence affects information asymmetry among investors. Overall, our paper contributes to a better understanding of how board independence influences the trading environment via the information environment.

Keywords

Corporate governance, board independence, earnings quality, management forecasts, analysts, information asymmetry

Discipline

Accounting | Corporate Finance

Research Areas

Corporate Reporting and Disclosure

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