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Does mandated independence improve firm performance? Evidence from New Zealand

Does mandated independence improve firm performance? Evidence from New Zealand PurposeThis paper aims to examine the relationship between board independence and firm performance for publicly listed New Zealand (NZ) firms over the period 2004-2016.Design/methodology/approachTo address endogeneity concerns, the relationship between firm performance and board independence is modelled using three different approaches: firm fixed-effect estimation, difference-in-difference estimation and two-stage least squares estimation, while controlling for firm and governance characteristics.FindingsThe main finding is that the mandated board independence introduced by the Best Practice Code does not improve operating or market performance for listed NZ firms.Research limitations/implicationsThe fact that NZ firms choose greater board independence than required is puzzling. Research examining director characteristics and connectedness, not captured by the NZX Code, may be a fruitful area for future research when disclosure allows.Practical implicationsRegulators may need to review reasons for mandating changes in factors affecting firm governance before implementing further regulations concerning board structure.Social implicationsThe findings cast doubt on the benefit of mandated board independence for NZ firms. The results imply that “good” governance practices proposed by regulators are not universal.Originality/valueThis paper tests the impact of mandated board independence following the adoption of the Best Practice Code in 2004 using methodologies that account for endogeneity using 13 years of data. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Pacific Accounting Review Emerald Publishing

Does mandated independence improve firm performance? Evidence from New Zealand

Pacific Accounting Review , Volume 30 (1): 18 – Feb 5, 2018

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Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
0114-0582
DOI
10.1108/PAR-01-2017-0004
Publisher site
See Article on Publisher Site

Abstract

PurposeThis paper aims to examine the relationship between board independence and firm performance for publicly listed New Zealand (NZ) firms over the period 2004-2016.Design/methodology/approachTo address endogeneity concerns, the relationship between firm performance and board independence is modelled using three different approaches: firm fixed-effect estimation, difference-in-difference estimation and two-stage least squares estimation, while controlling for firm and governance characteristics.FindingsThe main finding is that the mandated board independence introduced by the Best Practice Code does not improve operating or market performance for listed NZ firms.Research limitations/implicationsThe fact that NZ firms choose greater board independence than required is puzzling. Research examining director characteristics and connectedness, not captured by the NZX Code, may be a fruitful area for future research when disclosure allows.Practical implicationsRegulators may need to review reasons for mandating changes in factors affecting firm governance before implementing further regulations concerning board structure.Social implicationsThe findings cast doubt on the benefit of mandated board independence for NZ firms. The results imply that “good” governance practices proposed by regulators are not universal.Originality/valueThis paper tests the impact of mandated board independence following the adoption of the Best Practice Code in 2004 using methodologies that account for endogeneity using 13 years of data.

Journal

Pacific Accounting ReviewEmerald Publishing

Published: Feb 5, 2018

References

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