Director Ownership, Governance, and Performance

We study the impact of Sarbanes-Oxley Act (SOX) on the relationship between corporate governance and company performance. We consider five measures of corporate governance during the period 1998-2007. We find a negative and significant relationship between board independence and operating performance during the pre-2002 period, but a positive and significant relationship during the post-2002 period; this is consistent with and supportive of the event-study results of Chhaochharia and Grinstein (2007). The stock ownership of directors is consistently positively and significantly related to performance for both sub-periods. Other measures, such as the governance indices introduced by Gompers, Ishii and Metrick (2003) and Bebchuk, Cohen and Ferrell (2009) provide inconsistent results. The above findings are robust to a battery of specification tests. The most important contribution of this paper is our proposal of a governance measure, namely – dollar ownership of the board members – that is simple, intuitive, less prone to measurement error, and not subject to the problem of weighting a multitude of governance provisions in constructing a governance index. Consideration of this governance measure by future researchers would enhance the comparability of research findings with more robust progress in governance research.