Title: Monitoring role of the board and ownership concentration: from interests misalignment to expropriation

Authors: Richard Bozec; Mohamed Dia

Addresses: Telfer School of Management, University of Ottawa, 55 Laurier E, Ottawa, Ontario K1N 6N5, Canada ' Department of Finance and Operations, Faculty of Management, Laurentian University, Ramsey Lake Road, Sudbury, Ontario P3E 2C6, Canada

Abstract: Despite all the value placed on the independent director by financial market participants and regulators, empirical evidence on the relation between board independence and firm performance is largely inconclusive. The objective of this paper is to revisit the board independence-performance relationship while taking into account the ownership structure of the firm. The study is conducted over a four-year period (2002-2005) using panel regressions on a sample of Canadian publicly traded companies (502 firm-year observations). The results show a positive and significant relationship between board independence and Tobin's Q only when ownership is concentrated in the hands of a controlling shareholder (legal control). The highest level of separation between voting and cash flow rights is also found in controlled entities. The greater the gap between voting and cash flow rights, the stronger the relationship between board independence and performance. Overall, evidence supports the expropriation effect argument.

Keywords: board independence; firm performance; ownership concentration; controlled entities; excess voting rights; interests misalignment; expropriation risks; private benefits; legal control; monitoring role; board of directors; ownership structure; Canada; controlling shareholder; cash flow rights.

DOI: 10.1504/IJAF.2015.076175

International Journal of Accounting and Finance, 2015 Vol.5 No.4, pp.338 - 361

Received: 19 Dec 2014
Accepted: 18 Dec 2015

Published online: 26 Apr 2016 *

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