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Outside Directors, Information Acquisition Costs, and Board Risk Reporting

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Title:Outside Directors, Information Acquisition Costs, and Board Risk Reporting
Authors:Amiraslani, Hami
Deller, Carolyn
Ittner, Christopher
Keusch, Thomas
Keywords:Board reporting
Outside directors
Information acquisition costs
Date Issued:2021
Abstract:Theory predicts that the effectiveness of corporate boards in conducting their monitoring and advising activities depends on outside directors’ information acquisition costs and management’s willingness to truthfully share information with the board. Using proprietary survey data on board risk reporting, we examine whether directors’ information acquisition costs are related to firms’ internal reporting practices, and whether the effectiveness of non-executive directors depends on the quality of internal board reporting. Consistent with theory, we show that boards receive more frequent and more detailed reports when a larger fraction of board directors are non-executives. Furthermore, we establish that the extent of board reporting is predictably related to proxies for non-executive directors’ information acquisition costs and alternative information sources, such as their expertise, business, and network size. Contrary to predictions about opportunistic reporting by management, out findings indicate that directors receive more frequent and detailed reports when firm performance is poor. Finally, we document that the relation between board independence and future firm performance is more pronounced when directors receive more frequent and detailed board reports. Collectively, these results contribute to our understanding of the role of unobservable board reporting practices and their relation to the effectiveness of independent outside directors.
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