An empirical analysis of board activity, corporate governance mechanisms, and firm value

Abstract

We studied the relationship between board activity, a firm’s existing corporate governance structures and mechanisms, and firm value. The association between board activity and corporate governance variables is complex and multi-faceted. The two testable propositions in the study were that: an association exists between board activity and an array of corporate governance mechanisms; and that board activity adds value to the firm and by inference to shareholders. Board activity, measured by the frequency of board meetings, had a negative but lagged relationship with financial performance, a negative relationship with the size of the board, a negative relationship with insider ownership, a positive relationship with both the number of block holders and the number of other directorships held by directors, and insignificant relationships to both board independence and the number of committees. This confirms that other ownership and board composition characteristics could substitute board activity. The analysis of the interaction between board meetings frequency and the value of the firm is lagged but positive, implying relatively low market valuations triggers intervention of the board through frequent meetings that apparently impacts positively on firm value.