Advising Versus Monitoring: A Study of Agency Theory and the Effect of Board Composition on the Long-Run Financial Performance of Publicly Traded Companies in the Unites States

Abstract

In an effort to restore investor confidence and public trust after a series of financial-reporting scandals in the late 1990s, government officials and financial regulators urged the U.S. stock exchanges to impose tougher oversight rules on publicly traded companies. The general purpose of this study is to provide insight into the debate over the advising and monitoring roles associated with the board of directors. The specific purpose of this study is to investigate the impact of the 2003 board-independence mandate on the long-run financial performance of U.S. publicly traded companies. We hypothesize that the long-run financial performance of companies with insider- controlled boards will increase as a result of the mandate. Applying a difference-in-difference statistical methodology, we discovered that return on assets increased for companies that transitioned to independent boards following the mandate. We found similar results when we changed the measure of financial performance to ROS. The results remain consistent even after changing the definition of the main independent variable in subsequent robustness tests. On average, companies benefitted from the strengthened oversight rules associated with independent boards.

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