Real Effects of Worldwide Board Reform on Capital and Labor Investment Efficiency

This study investigates whether board reforms affect firms’ capital and labor investment efficiency. Based on difference-in-differences analyses, we show that board reforms improve capital investment efficiency. Importantly, after controlling for capital investment inefficiency, board reforms also facilitate more efficient investments in labor. Further, our analysis shows that the real investment effects of board reforms occur through the enhanced quality of financial reporting. These results are primarily driven by reforms related to the increased independence of the board and audit committee/auditor. Furthermore, board reforms have stronger impacts on both capital and labor investment efficiencies in comply-or-explain countries than in rule-based countries. Overall, this broader focus on investments in capital assets as well as employment increases our knowledge of the importance of board reforms to real investment decisions