Does Board Independence Influence Asset Redeployability? Evidence From a Quasi-Natural Experiment

Purpose: Exploiting an exogenous regulatory shock and a novel measure of asset redeployability, we explore the effect of independent directors on asset redeployability. In particular, we employ an innovative measure of asset redeployability recently developed by Kim and Kung (2017). This novel index has been rapidly adopted in the recent literature.Design/Methodology: Relying on a quasi-natural experiment, we execute a difference-in-difference analysis based on an exogenous regulatory shock to board independence. To mitigate endogeneity and demonstrate causation, we also perform propensity score matching, instrumental-variable analysis, and Oster’s (2019) approach for testing coefficient stability.Findings: Our difference-in-difference estimates show that firms forced to raise board independence have significantly fewer redeployable assets after the shock than those not required to change board composition. This is consistent with the managerial myopia hypothesis. Subject to more intense monitoring, managers behave more myopically, focusing more on assets that are currently useful to the firm and less on redeployability in the future.Originality: Our study makes key contributions to the literature. First, our study is the first to examine the effect of board governance on asset redeployability. Second, we exploit an innovative index of asset redeployability that has been recently constructed in the literature. Third, by using a natural experiment, our results are much more likely to reflect causality than merely an association