Is Board Structure One-size-fits-all? the Unintended Informational Consequence of the Sarbanes-oxley Act

In this paper we examine how board structure affects the informativeness of board members by comparing the returns earned by officers and independent directors from purchasing the firm’s stock. We investigate whether an exogenous shock to the board structure – the 2002 SarbanesOxley Act and the related mandates – leads to a shift in information asymmetry between officers and independent directors. We find that improvement in board’s information environment is limited to firms whose boards are previously controlled by outsiders. In contrast, information asymmetry rises among firms whose boards are previously dominated by insiders: An increase in independent directors is followed by a significantly larger difference in buy-and-hold returns between officers and independent directors. In addition, the deterioration in board’s information environment is associated with a poor firm operating performance.