Does institutional ownership affect information sharing with independent board members?

Date01 October 2019
AuthorDeborah D. Smith,Heidi H. Meier,Pervaiz Alam
Published date01 October 2019
Does institutional ownership affect information sharing
with independent board members?
Deborah D. Smith
| Heidi H. Meier
| Pervaiz Alam
Department of Accounting, Cleveland State
University, Cleveland, Ohio
Department of Accounting, Kent State
University, Kent, Ohio
Deborah D. Smith, Department of
Accounting, Cleveland State University,
Cleveland, OH.
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.
agency theory, board independence, corporate governance, information asymmetry, sticky costs
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;

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