Corporate Governance and Cost Management: Evidence from Global Board Reforms

Using data on the staggered adoption of board reforms across the globe, we study the effects of corporate governance on cost management. Boards discuss and decide on a wide range of issues with far-reaching implications for corporate cost behavior. We find that board reforms, which predominantly aim to increase board independence as well as establish board committees, restrict managerial opportunism in terms of cost behavior. While critics of board reform legislation note that increases in board independence and monitoring efficiency are rather “cosmetic”, we show that the staggered, worldwide adoption of board reforms results in a decrease in cost asymmetry between 50 and 75 percent, depending on the specification. Our results are robust to a range of modifications, additional tests and influential variables discussed in the still limited literature on international cost behavior.