Does institutional ownership affect information sharing with independent board members?

• Date: 01 October 2019
• Author: Deborah D. Smith,Heidi H. Meier,Pervaiz Alam
• Published date: 01 October 2019
• DOI: http://doi.org/10.1002/jcaf.22403

BLIND PEER REVIEW

Does institutional ownership affect information sharing

with independent board members?

Deborah D. Smith

1

| Heidi H. Meier

1

| Pervaiz Alam

2

1

Department of Accounting, Cleveland State

University, Cleveland, Ohio

2

Department of Accounting, Kent State

University, Kent, Ohio

Correspondence

Deborah D. Smith, Department of

Accounting, Cleveland State University,

Cleveland, OH.

Email: d.l.smith11@csuohio.edu

Abstract

Research Question: This is an investigation of board independence to determine

whether management shares information with the board, or withholds information

to retain autonomy. A key contribution is to examine the interaction of institutional

ownership with the main test variables to determine whether institutional gover-

nance influences the information environment as board independence is increased.

Research Findings: The results show that information asymmetry decreases inter-

nally and increases externally as board independence increases, yet institutional

ownership appears to moderate or reverse this relationship. The following variables

are used to explain why managers of firms are likely to have more information than

outsiders: sticky SG&A costs, bid-ask spread, and forecast error.

Theoretical/Academic Implications: The desired oversight from independent

board members appears to be associated with reduced transparency between the

firm and investors. Information sharing is lower for increased board independence

when the firm's ownership is less sophisticated.

Practitioner/Policy Implications: These findings suggest that requiring increased

board independence may reflect reduced transparency for firms with less institutional

ownership. Further research should be conducted on the influence of institutional

ownership on board member selection, and the relationship between management

and board members appointed with institutional support.

KEYWORDS

agency theory, board independence, corporate governance, information asymmetry, sticky costs

1|INTRODUCTION

Ideally, corporate governance should align the interest of

shareholders, board of directors and managers. The role of finan-

cial reporting is to reduce information asymmetry between man-

gers and the investment community. Therefore, there is a need

for transparency in the financial reporting environment of the

firm. Additionally, the board of directors should have the exper-

tise and independence to advise the managers. Outside directors

bring independence and objectivity in monitoring management

whereas inside directors have firm-specific information about

resources and opportunities which could prove useful for the

board. Many of the prior studies on board independence did not

control for institutional ownership, which reached 75% of the

market in 2005 (Davidoff, 2013), yet the influence of this more

sophisticated ownership has the potential to affect board size and

composition. The increase in institutional ownership over time

has strengthened shareholder power in determining CEO and

director appointments and replacements through activism. As

management and institutional owners negotiate for sway over

Correction added on October 10, 2019, after first online publication: Article

type updated to “Blind Peer Review.”

Received: 28 March 2019 Accepted: 30 May 2019

DOI: 10.1002/jcaf.22403

54 © 2019 Wiley Periodicals, Inc. J Corp Acct Fin. 2019;30:54–68.wileyonlinelibrary.com/journal/jcaf