Independent and Minority Appointed Directors Enhance Transparency and Shareholder Protection, New Study Finds
AN ANALYSIS OF THE ITALIAN STOCK MARKET BY THREE BOCCONI UNIVERSITY SCHOLARS SHOWS THAT COMPANIES WITH INDEPENDENT AND MINORITYAPPOINTED DIRECTORS DISCLOSE MORE INFORMATION AND IN A MORE DETAILED WAY. MARKET REACTION PROVES THAT THE ADDITIONAL INFORMATION IS IN FACT RELEVANTThe presence of independent and minority-appointed directors is commonly considered a positive feature of a corporate board, but empirical analysis is scarce. New research by Piergaetano Marchetti, Gianfranco Siciliano and Marco Ventoruzzo, three scholars from Bocconi University, highlights that independent and minority-appointed directors positively affect the quantity and quality (as perceived by the market) of released information, thus fostering minority protection and transparency.
The paper analyzes 223 corporations listed in the Italian stock market during the 2005-2015 period, for a total of 2,003 firm/year observations. On average, sample firms make about 20 disclosures per year and the percentage of independent directors in the board is 41%.
The authors observe a positive relation between corporate disclosure (and, in particular, accounting-related disclosure) and the percentage of independent directors in the board: on average, an increase of 10% in the percentage of independent directors is associated to a 6.5% increase in the number of disclosures announced to the market and to a 14.5% increase in the number of accounting-related disclosures.
The quality of the independent directors is also relevant, since a significant portion of the additional disclosure occurs when independent directors are high-skilled (i.e. with professional qualifications and education above the median). Furthermore, information disclosed by high-skilled, independent directors is deemed valuable by the market, which reacts in a more pronounced way to this information than to information released by companies with lower-skilled independent directors.
«We can say that that the market relies more on better-educated and professionally qualified directors», Professor Ventoruzzo says.
The scholars also unveil other features of the transparent listed firm: corporations disclosing more are more international, often cross-listed in the US and larger in size, while firms with a more concentrated ownership disclose less.
Thanks to a mandatory mechanism called list voting, in Italian listed companies some directors can be appointed by minority shareholders, thus making Italy the perfect bedrock to check whether their presence plays a role in the release of price-sensitive information. Even if in Italy, as in the rest of the European Union, the law imposes to release any price-sensitive (or privileged) information, it turns out that the likelihood of disclosing privileged information increases with the percentage of minority-appointed independent directors. A 10% increase in the percentage of minority-appointed independent directors is associated with a 14.40% higher probability of issuing privileged information and with a 31% increase in the number of pages containing privileged information (which is not only disclosed, but also much more detailed).
Markets, again, deem the information relevant, with absolute abnormal returns of the share significantly higher when privileged information is released than non-privileged.
«If a rigorous compliance with disclosure obligations is desired», Prof. Ventoruzzo closes, «we should consider directors appointed by minority shareholders as a value to the corporate governance system, something that undoubtedly contributes to make our issuers more attractive for international investors, and particularly institutional ones such as mutual funds. Something that the economy needs to lower the cost of capital and finance growth and investments».
Piergaetano Marchetti, Gianfranco Siciliano, Marco Ventoruzzo, Disclosing Directors, Bocconi Legal Studies Research Paper Forthcoming, available on SSRN.
by Fabio Todesco
