Breaking the linear mould: exploring the non-linear relationship between board independence and investment efficiency

• Published in: Managerial Finance
• Main Author: Kamarudin K.A.; Hassan N.H.; Wan Ismail W.A.
• Format: Article
• Language: English
• Published: Emerald Publishing 2024
• Online Access: https://www.scopus.com/inward/record.uri?eid=2-s2.0-85181530961&doi=10.1108%2fMF-08-2023-0482&partnerID=40&md5=a8e71608e95f9571b64f137198429826

Purpose: This study examines the non-linear effect of board independence on the investment efficiency of listed firms worldwide. This study further tests whether the COVID-19 pandemic, industry competition and economic development influence the relationship between board independence and investment efficiency. Design/methodology/approach: The data are retrieved from the Thomson Reuters (Refinitiv) database and include international data from 33 countries, comprising 21,363 firm-year observations. The authors' regression analyses include firm-specific variables as controls that may impact investment efficiency. The authors also perform various robustness tests including, alternative measures of investment efficiency, weighted least squares regression, quantile regression and endogeneity issues. Findings: The results reveal a non-linear relationship between board independence and investment efficiency. Specifically, the relationship follows a U-shaped pattern, indicating that the negative impact of board independence on investment efficiency becomes positive after it reaches its optimal point, thus supporting optimal board structure theory. Interestingly, the authors find no significant evidence of board independence’s effect on investment efficiency during the pandemic. In contrast, the relationship between board independence and investment efficiency is significant only during the non-pandemic period. Furthermore, the authors discover evidence of a U-shaped relationship in both emerging and developed markets, as well as in industries with high and low competition. Research limitations/implications: The authors' study discovers new evidence on the non-linear impact of board independence on investment efficiency, which has not been explored previously in existing research. Practical implications: This study has practical implications for investors by emphasising the importance of corporate governance and the appointment of independent directors. Investors should consider the findings of this study when making decisions related to corporate governance, as they can impact a firm's investment efficiency. Originality/value: Despite a considerable body of literature exploring the link between corporate governance and investment effectiveness, there is a dearth of research on the non-linear effects of board independence. Furthermore, the effects of the COVID-19 pandemic, industry competition and economic development remain unexplored. © 2023, Emerald Publishing Limited.