Title

The Effect Of Director Monitoring On Bid And Ask Spreads

Keywords

Audit committee; Director monitoring; Director shareholdings; Open limit order market

Abstract

We examine whether the market assesses a lower level of information asymmetry to firms that are perceived to be monitored more intensely by members of the board of directors. We use changes in bid-ask spreads as proxies for changes in information asymmetry between the firm and the market around the time earnings are announced. Our study is innovative in its association of director monitoring with levels of information asymmetry as reflected in quoted spreads. Our sample includes 145 firms included in the Toronto Stock Exchange 300 Index (TSX-300). The TSX's hybrid market structure provides a unique international setting in which to examine the effects of governance on information asymmetry. Results indicate that the market attributes a lower level of information asymmetry to firms with a larger proportion of outside directors on the board. Contrary to our predictions, we find the larger the proportion of voting rights held by directors, the higher the level of information asymmetry attributed to the firm. We provide some evidence that a separate CEO/Chair leadership structure is associated with reduced information asymmetry. From a practice perspective, we are able to provide some preliminary insight into the potential value attributed by market participants to the imposition of regulation surrounding certain director monitoring activities.

Publication Date

10-1-2010

Publication Title

Journal of International Accounting Research

Volume

9

Issue

2

Number of Pages

45-65

Document Type

Article

Personal Identifier

scopus

DOI Link

https://doi.org/10.2308/jiar.2010.9.2.45

Socpus ID

80052826549 (Scopus)

Source API URL

https://api.elsevier.com/content/abstract/scopus_id/80052826549

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