Does Board Composition Matter to Institutional Investors?. (August 2019)

• Record Type: Journal Article
• Authors: Bansal, Shashank; Thenmozhi, M.
• Is Part Of: Journal of emerging market finance. Volume 18:Number 2(2019:Apr.)Supplement
• Page Start: S238
• Page End: S266
• Publication Date: 2019-08
• Subjects: Board composition -- independent directors -- institutional investors -- corporate governance -- signalling theory -- resource dependency theory; Banks and banking -- Developing countries -- Periodicals; Financial institutions -- Developing countries -- Periodicals; Securities -- Developing countries -- Periodicals; 332.09172405
• DOI: 10.1177/0972652719846354
• Languages: English
• ISSNs: 0972-6527

Abstract

This study examines the resource dependency and signalling role of independent directors from the perspective of institutional investor's and also investigates if the presence of large blockholder moderates the signalling effect. This study uses the quasi-natural experiment to examine this relationship. The difference-in-difference (DiD) analysis of 5, 298 firm observations covering 618 National Stock Exchange (NSE) listed Indian firms for the period 2001–2011 provides empirical evidence that board composition does matter to institutional investors. We find that non-compliant firms who adopted the board independence requirement experience a significant increase in institutional ownership relative to previously compliant firms. We also find that institutional investors have invested more in family-owned firms during post-mandate period compared to government-, private- and foreign-owned firms. Overall, this study contributes to the existing literature on resource dependency theory and signalling theory and shows that the board independence acts as a signal to institutional investors and decreases the agency cost and cost of monitoring. JEL Codes: G3, G11, G34, G38, G23