Financial experience and boards of directors : an empirical assessment of impact on stock price synchronicity, cash holding and payout policy

Abstract

This thesis examines the effect of directors’ experience on stock price synchronicity, cash holding and payout policy by focusing on two financial related experiences: namely, accounting and non-accounting financial experience. Using non-financial firms from the S&P 1500 database between 1999 and 2017, this study provides new evidence that stock price synchronicity reduces with more accounting financial experience on board, supporting the argument that directors with accounting financial experience enhance the disclosure of firm-specific information, thereby, enhancing firms’ informational environment. The relationship is reported to be nonheterogeneous across different types of corporate governance. Furthermore, a difference-in-difference test concludes that the study results are not driven by endogeneity. Moreover, the relationship between financial-experts on board and stock price synchronicity is robust to other board characteristics and sample settings. The study also reveals the ability of financial-expert directors to reduce firm cash holding in support of the flexibility hypothesis. Financial experts on board also enhance firm excess cash profitability and market-to-book value. This finding is robust to controlling board characteristics and different cash holding measures. However, the relationship varies in terms of firms different measures of corporate governance and levels of financial constraint. Accounting financial-experts were also found to increase firm payouts in support of the outcome hypothesis. The results are robust to controlling board characteristics and sample setting. In addition, results also show the effect of accounting financial-experts on payout to be more prominent in firms with weak corporate governance mechanisms and those facing financial constraints. Finally, additional investigation reveals that accounting financial-experts on board are more likely to pay shareholders in the form of repurchase, rather than dividends, in which emphasis is on the financial-experts’ role in enhancing board monitoring through the influence of distributing free cash flow through non-pre-committed shareholders’ payments.