Does the Intensive Board Monitoring Always Improve the Shareholder Wealth?

Ji Hye Lee; Byun， Hee Sub

doi:10.23842/jif.2017.28.4.002

Journal of Insurance and Finance

2017, 28(4), pp.35-98
DOI :10.23842/jif.2017.28.4.002
Publisher : Korea Insurance Research Institute
Research Area : Business Management

Ji Hye Lee ¹ , Byun， Hee Sub ²

¹ 한국건설산업연구원
² 한림대학교

ABSTRACT

This study investigates the effect of intensive board monitoring, which is measured by the structure of monitoring committees (audit committee, outside director nomination committee, and compensation committee) in the board, on the shareholder wealth in Korea. More importantly, we confirm how this effect can be changed by the various firm characteristics related to the managerial incentives and the efficiency of corporate control mechanisms. Based on this approach, we provide the alternative arguments to the multilateral views to understand the benefits and costs of board monitoring in emerging markets. Empirically, we find that the high proportion of outside directors in monitoring committees has the positive effect on the firm value. However, this effect decreases or disappears as firms’ age, leverage ratio, volatility of cash flow, competitive threats, and the ownership of controlling shareholders increases, while the effect gets stronger as firms’ free cash flow, the opaqueness of assets and the ownership of institutions become greater. These results mean that the value enhancing the effect of board monitoring depends on the firm characteristics which are closely related to the possibility of agency problem and the necessity of growth strategy of the firm. Additionally, confirming the effect on payout policy, we obtain the similar result in the interaction between board monitoring and firms’ age, volatility of cash flow, and ownership of controlling shareholders. Looking beyond this study, our results support the argument of prior literature which suggests that the one size does not fit all: the agency problem will not be solved by one specific control mechanism, therefore we should consider the practical complexity of corporate management and various factors.
KEYWORDS

Monitoring committees in the board , Outside director , Firm characteristic , Firm value , Dividend policy
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